Which of these cloud-based AI companies has a brighter future? CoreWeave (CRWV 3.75%) and DigitalOcean (DOCN -0.86%) both help companies process artificial (AI) tasks with their cloud-based graphics processing units (GPUs). CoreWeave, previously a cryptocurrency mining company, mainly serves larger companies. DigitalOcean splits its servers into "droplets" for smaller businesses and developers. Each should be in a good position to profit from the explosive growth of the AI market. However, investors are cle ...

Group 1: C3.ai Overview - C3.ai has experienced a significant decline of almost 22% in its stock price in 2025 [1] - Despite healthy growth driven by increased adoption of its AI software solutions, market confidence in C3.ai is low, with only four out of 17 analysts recommending a buy [2] - The company is not yet profitable, with a non-GAAP net loss that contracted by just 13% while revenue grew by 25% in the fiscal year ending April 30, 2025 [4] Group 2: DigitalOcean Overview - DigitalOcean is positioned to benefit from the growing demand for AI software, offering cloud computing platforms primarily for small companies and early-stage developers [6] - The company provides a range of Nvidia and AMD GPUs, allowing clients to save up to 75% in costs compared to hyperscalers [8] - DigitalOcean's average revenue per user increased by 14% year over year in Q1 2025, indicating strong customer spending [10] Group 3: Market Potential and Growth Projections - The GPU-as-a-service market is projected to grow from approximately $4.3 billion in 2024 to nearly $50 billion by 2032, presenting significant opportunities for DigitalOcean [10] - DigitalOcean expects to grow its customer base at an annualized rate of 13% and anticipates existing customers will increase spending by 5% to 7% annually [11] - Analysts have set a 12-month price target of $38 for DigitalOcean, which is 32% higher than its current level, with a potential market cap increase from $2.60 billion to $3.5 billion [13] Group 4: Valuation and Investment Outlook - DigitalOcean is trading at 15 times forward earnings, which is about half the average forward earnings multiple of the Nasdaq-100 index [14] - The anticipated acceleration in earnings growth could lead to a higher valuation multiple for DigitalOcean, making it an attractive investment opportunity [14]

Company Overview - SoundHound AI is a leading developer of conversational AI software, experiencing rapid revenue growth with a stock increase of 835% in 2024 after Nvidia's investment, although Nvidia has since divested its stake [1] - DigitalOcean is an emerging AI company focused on providing cloud computing services tailored for small and mid-sized businesses (SMBs), featuring a growing portfolio of AI services [2] SoundHound AI - SoundHound AI has secured a notable customer base, including automotive companies like Hyundai and Kia, and restaurant chains such as Chipotle and Papa John's, utilizing its conversational AI software to enhance customer experiences [4] - The company’s Chat AI product is being integrated into vehicles to assist drivers with various features, while its software is also used by restaurants to autonomously take orders and assist employees [5][6] - In 2024, SoundHound generated $84.7 million in revenue, marking an 85% increase from the previous year, with projections of $167 million in 2025, indicating a growth rate of 97% [7] - SoundHound has an order backlog exceeding $1.2 billion, expected to convert into revenue over the next six years, supporting future growth [7] - Despite revenue growth, SoundHound reported a non-GAAP loss of $69.1 million in 2024 and an additional $22.3 million in Q1 2025, with $246 million in cash on hand, raising concerns about sustainability [8][9] DigitalOcean - DigitalOcean operates in a cloud computing market dominated by large tech companies, focusing on the underserved SMB segment with clear pricing and customer service [10][11] - The company provides access to GPU resources, allowing SMBs to deploy AI applications efficiently, including a new platform called GenAI for creating custom AI agents [12][13] - DigitalOcean anticipates $880 million in total revenue for 2025, reflecting a 13% growth, while its AI revenue surged by 160% in Q1 2025 [14] - The company reported a GAAP net income of $84.5 million in 2024, a 335% increase from the previous year, with Q1 2025 net income rising by 171% to $38.2 million [15] Valuation Comparison - SoundHound AI's stock trades at a high price-to-sales (P/S) ratio of 41.4, significantly higher than DigitalOcean's modest P/S ratio of 3.5, indicating a more attractive valuation for DigitalOcean [16] - DigitalOcean's price-to-earnings (P/E) ratio stands at 26.2, making it cheaper compared to larger cloud providers, while SoundHound's lack of profitability limits its valuation metrics [18] - The high valuation of SoundHound may restrict its upside potential, especially given its ongoing losses, while DigitalOcean presents a more appealing investment opportunity due to its profitability and growing AI revenue [20]

Core Industry Insights - Cloud computing is currently a highly sought-after sector, with hyperscalers significantly increasing their demand for computing capacity [1] - Companies like CoreWeave (NASDAQ: CRWV) are benefiting from the strong growth trends in the cloud computing market [1]

Company Overview - SoundHound AI is a leader in conversational AI, experiencing significant revenue growth but facing substantial cash burn to support this expansion [1][10] - DigitalOcean focuses on providing cloud computing services to small and mid-sized businesses (SMBs) and is expanding its AI service offerings [3][5] Financial Performance - SoundHound AI reported $29.1 million in revenue for Q1 2025, a 151% increase year-over-year, but incurred a non-GAAP loss of $22.3 million, a 10% increase from the previous year [10][11] - DigitalOcean generated $210.7 million in revenue during the same quarter, a 14% increase year-over-year, with AI revenue soaring by 160% [13][14] Profitability - SoundHound AI is currently unprofitable, with a need to prioritize profitability to avoid future cash injections that could dilute shareholder value [12] - DigitalOcean is profitable, with a GAAP net income of $38.2 million, a 171% increase, and a non-GAAP net income of $55.4 million, a 30% increase [14] Valuation Metrics - SoundHound AI has a high price-to-sales (P/S) ratio of 36.6, while DigitalOcean's P/S ratio is significantly lower at 3.5 [15] - If SoundHound's P/S ratio were to align with Nvidia's at 23.6, its market cap would drop to $2.7 billion, closer to DigitalOcean's valuation [18] Market Outlook - DigitalOcean's AI revenue growth and profitability suggest strong upside potential, while SoundHound may face challenges ahead [20]

Core Viewpoint - DigitalOcean's stock has seen a significant decline of approximately 40% since mid-February despite strong quarterly performance, presenting a potential buying opportunity for investors [1][3]. Group 1: Company Performance - DigitalOcean reported a revenue growth of 14% year-over-year in Q1 2025, an improvement of 2 percentage points from Q1 2024 [5]. - Adjusted earnings increased by 30% year-over-year, indicating robust financial health [5]. - The company's annual recurring revenue (ARR) from AI services surged by 160% year-over-year in Q1 2025, driven by the introduction of new AI-focused services [9]. Group 2: AI Adoption and Services - The demand for DigitalOcean's cloud-based AI services has significantly increased, attributed to the growing adoption of AI technologies [2][6]. - DigitalOcean's GenAI Platform, launched in January 2025, has attracted over 5,000 customers who have built more than 8,000 AI agents [8][9]. - The company has released 50 new features in the last quarter, a fivefold increase from the previous year, enhancing its product offerings [9]. Group 3: Market Potential - The demand for AI agents is projected to grow at an annual rate of 46% through 2030, with cloud-based AI services expected to increase at a compound annual growth rate of 30% over the next eight years [10]. - DigitalOcean estimates its total addressable market (TAM) to be around $140 billion, suggesting significant growth potential [10]. Group 4: Valuation and Investment Opportunity - DigitalOcean is currently trading at a price-to-earnings (P/E) ratio of 26, with a forward P/E ratio of 15, indicating an attractive valuation for growth investors [11]. - The company's earnings forecast for 2025 is between $1.85 and $1.95 per share, which may not reflect substantial growth due to increased capital expenditures [12]. - Average revenue per customer has risen by 14% year-over-year, with potential for further increases as new AI services are added [13].

Core Viewpoint - Investors in DigitalOcean Holdings, Inc. (DOCN) should closely monitor the stock due to significant movements in the options market, particularly the July 18, 2025 $17.5 Call which has high implied volatility [1] Company Analysis - DigitalOcean Holdings is currently ranked 3 (Hold) in the Internet – Software industry, which is in the top 20% of the Zacks Industry Rank [3] - Over the last 60 days, two analysts have raised their earnings estimates for the current quarter, while three have lowered theirs, resulting in a decrease of the Zacks Consensus Estimate from 48 cents per share to 47 cents [3] Options Market Insights - The high implied volatility suggests that options traders are anticipating a significant price movement for DigitalOcean Holdings shares, indicating potential upcoming events that could lead to a rally or sell-off [2][4] - Seasoned options traders often seek to sell premium on options with high implied volatility, aiming to benefit from the decay of the option's value if the underlying stock does not move as much as expected by expiration [4]

Group 1: Industry Overview - The cloud computing industry is primarily dominated by major players like Amazon, Microsoft, and Alphabet, which focus on large enterprises, leaving a gap in services tailored for small and medium-sized businesses (SMBs) [1] - DigitalOcean specializes in providing cloud services exclusively to SMBs, differentiating itself with a growing portfolio of artificial intelligence (AI) services [2][5] Group 2: Company Performance - DigitalOcean's stock has decreased by 76% from its peak in 2021, but the company is showing signs of attractive valuation due to accelerating revenue growth and increasing profits [3][13] - In Q1 2025, DigitalOcean reported total revenue of $210.7 million, marking a 14% year-over-year increase, with AI services contributing significantly to this growth [10][11] - The company achieved a remarkable 171% increase in net income to $38.2 million during the same quarter, translating to earnings per share (EPS) of $0.39 [12] Group 3: AI Services and Market Potential - DigitalOcean is enhancing SMB access to AI through its infrastructure equipped with GPUs from suppliers like Nvidia and AMD, offering fractional capacity for cost-effective AI deployment [6][7] - The launch of the GenAI platform allows SMBs to create custom AI agents, with 5,000 customers already deploying over 8,000 AI agents [8][9] - DigitalOcean estimates its addressable market at $400 billion, indicating significant growth potential, especially with the rapid expansion of its AI revenue [18] Group 4: Valuation Metrics - DigitalOcean's price-to-sales (P/S) ratio has decreased to 3.7, representing a 34% discount compared to its three-year average of 5.6, making it appear undervalued [13] - The company's price-to-earnings (P/E) ratio stands at 27.6, near its lowest level since going public, and is cheaper than the Nasdaq-100 index's P/E ratio of 29.3 [15][17]

Core Insights - DigitalOcean has established a niche in the cloud computing industry by prioritizing simplicity and transparent pricing, attracting developers and businesses with limited IT budgets [1] - The company has recently adjusted its strategy under new leadership to emphasize cost savings, claiming customers can achieve over 30% savings in total cost of ownership by switching from hyperscalers [2][10] Financial Performance - In the first quarter, DigitalOcean reported a 14% year-over-year revenue increase, an improvement from the previous quarter's 12% growth [5] - The net dollar retention rate reached 100%, indicating a positive trend after previous contractions, although there is still no net expansion in spending from existing customers [6] Customer Base and Market Focus - Revenue from the Scalers+ customer group, spending at least $100,000 annually, surged by 41% year-over-year, now representing 23% of total revenue, up from 19% [7] - DigitalOcean is targeting digital native companies, which represent a $140 billion market, as they are less encumbered by legacy IT infrastructure, facilitating the transition to cloud services [8] Product Development and Offerings - The company has significantly accelerated its product development, releasing five times as many features in the first quarter compared to the same period last year, making its platform a more viable alternative to larger cloud providers [9] Future Outlook - DigitalOcean maintains its 2025 revenue growth outlook at 11.5% to 14% and a free cash flow margin of 16% to 18%, although it may be more vulnerable to economic downturns due to its customer base of smaller businesses [11] - Long-term targets include 18% to 20% revenue growth by 2027, with aspirations for over 20% growth thereafter, positioning itself as a cost-effective alternative to AWS [12] Market Reaction - Despite a strong value proposition, DigitalOcean's stock fell as investors expressed disappointment with the company's results and guidance, although the company is well-positioned to attract digital native customers seeking lower costs [13]

Revenue and Customer Growth - Revenue from Higher Spend Customers accounted for 88% of total revenue as of March 31, 2025, up from approximately 87% as of March 31, 2024[102]. - The number of Higher Spend Customers increased to approximately 171,000 as of March 31, 2025, compared to approximately 157,000 as of March 31, 2024[102]. - Average Revenue Per User (ARPU) rose from $95.13 in Q1 2024 to $108.56 in Q1 2025[103]. - Revenue for the three months ended March 31, 2025, was $210.7 million, a 14% increase from $184.7 million in the same period of 2024, driven by a 14% increase in ARPU to $108.56 from $95.13[140]. Financial Performance - Annual Run-Rate (ARR) increased to $843 million as of March 31, 2025, up from $739 million as of March 31, 2024[103]. - Net Dollar Retention (NDR) improved to 100% in Q1 2025, up from 97% in Q1 2024[107]. - Gross profit margin improved to 61% for the three months ended March 31, 2025, compared to 59% for the same period in 2024[141]. - Adjusted EBITDA for the three months ended March 31, 2025, was $86.3 million, representing a margin of 41%, compared to $74.3 million and a margin of 40% in the same period of 2024[167]. - GAAP net income attributable to common stockholders was $38.2 million for the three months ended March 31, 2025, compared to $14.1 million in the same period of 2024[171]. - Non-GAAP net income for the three months ended March 31, 2025, was $55.4 million, up from $42.7 million in the same period of 2024[171]. - GAAP diluted net income per share increased to $0.39 for the three months ended March 31, 2025, from $0.15 in the same period of 2024[171]. - Non-GAAP diluted net income per share was $0.56 for the three months ended March 31, 2025, compared to $0.43 in the same period of 2024[171]. Expenses and Cost Management - Sales and marketing expenses were approximately 9% of revenue for Q1 2025, down from 10% in Q1 2024[104]. - Cost of revenue increased by $5.7 million, or 8%, to $81.3 million for the three months ended March 31, 2025, primarily due to higher co-location costs from data center expansion[141]. - Research and development expenses rose by $6.7 million, or 20%, to $39.6 million for the three months ended March 31, 2025, mainly due to increased personnel costs and professional services[144]. - General and administrative expenses decreased by $13.0 million, or 28%, to $32.8 million for the three months ended March 31, 2025, primarily due to lower personnel costs related to acquisition-related compensation[146]. - Total operating expenses decreased by $5.8 million, or 6%, to $91.8 million for the three months ended March 31, 2025[144]. Cash Flow and Investments - Net cash provided by operating activities was $64.1 million for the three months ended March 31, 2025, a decrease from $66.7 million in the same period of 2024[157]. - Net cash used in investing activities was $65.0 million for the three months ended March 31, 2025, compared to $46.4 million provided in the same period of 2024, primarily due to a $91.7 million reallocation of marketable securities to cash equivalents[158]. - Net cash used in financing activities increased to $67.2 million for the three months ended March 31, 2025, from $11.2 million in the same period of 2024, driven by $50.3 million in stock repurchases[159]. - The company believes existing cash and cash equivalents, along with cash flow from operations, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months[150]. - As of March 31, 2025, the company had $360.4 million in cash and cash equivalents, primarily consisting of cash and money market funds[153]. Strategic Initiatives - The company released several new products in 2024, including GPU Droplets and the GenAI platform, to enhance its offerings[109]. - The company completed acquisitions of Paperspace and Cloudways to expand its AI/ML and Managed Hosting capabilities[112]. - The company is focused on increasing usage by existing customers and expanding its base of Higher Spend Customers through targeted strategies[108]. - The company plans to continue investing in infrastructure to support product portfolio and scalability of the customer base, which may affect future cost of revenue[127]. - The company approved a stock repurchase program of up to $140 million through fiscal year 2025, with $59 million spent to repurchase 1,564,254 shares in the three months ended March 31, 2025[151]. Geographic Revenue Distribution - The company serves customers across approximately 190 countries, with 37% of revenue generated from North America, 28% from Europe, 24% from Asia, and 11% from the rest of the world for Q1 2025[105]. Other Income and Taxation - Other income, net increased by $1.0 million, or 38%, to $3.7 million for the three months ended March 31, 2025, mainly from gains in foreign currency fluctuations[147]. - Income tax expense increased by $3.1 million, or 2,638%, to $(3.2) million for the three months ended March 31, 2025, due to higher pretax income[148].