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1 Growth Stock Down 68% You'll Regret Not Buying on the Dip in 2025
DOCNDigitalOcean(DOCN) The Motley Fool·2024-12-11 10:38

Core Insights - DigitalOcean is uniquely positioned in the AI revolution by targeting small and mid-sized businesses (SMBs), a market largely overlooked by major competitors like Amazon Web Services and Microsoft Azure [2][4][8] - The company has seen a significant increase in AI revenue, soaring nearly 200% year-over-year in Q3 2024, indicating strong demand for its services [8][12] - DigitalOcean's stock is currently trading 68% below its all-time high from 2021, presenting a potential buying opportunity for investors [3][13] Company Strategy - DigitalOcean focuses on SMBs, a 114billionnichemarket,offeringaffordablepricing,personalizedservice,anduser−friendlyinterfaces,whichareessentialforbusinesseslackingin−housetechnicalteams[5][6]−TheintroductionoffractionalGPUcapacityallowsSMBstoutilizebetweenoneandeightGPUs,enablingthemtorunsmallAIworkloadseffectively[7][8]−Thecompanyaimstoconvertstart−upsinto"scalers,"withasmallcohortofhigh−spendingcustomerscontributingsignificantlytorevenue[9][11]FinancialPerformance−DigitalOcean′stotalrevenuegrewby12114 billion niche market, offering affordable pricing, personalized service, and user-friendly interfaces, which are essential for businesses lacking in-house technical teams [5][6] - The introduction of fractional GPU capacity allows SMBs to utilize between one and eight GPUs, enabling them to run small AI workloads effectively [7][8] - The company aims to convert start-ups into "scalers," with a small cohort of high-spending customers contributing significantly to revenue [9][11] Financial Performance - DigitalOcean's total revenue grew by 12% year-over-year, with revenue from the "scalers" cohort increasing by 19%, highlighting the growth of its highest-spending customers [12] - The company's price-to-sales (P/S) ratio has decreased to 5.1, making it one of the cheapest valuations since going public, with a potential upside of 67% to reach its average P/S ratio of 8.5 [14] - DigitalOcean has achieved profitability, reporting earnings per share (EPS) of 0.87 over the last four quarters, with a P/E ratio of 46.2, which may decrease significantly as EPS grew by 1,800% year-over-year in the first three quarters of 2024 [15][16]