This AI Stock Is Soaring, but It's Not Too Late to Buy

Core Insights - DigitalOcean is rapidly expanding its artificial intelligence (AI) capabilities, having acquired AI start-up Paperspace in mid-2023 and building a full-scale AI computing platform under new CEO Paddy Srinivasan [1][2] Revenue Growth - DigitalOcean's total revenue increased by 14% year over year in the second quarter, slightly above the 13% growth reported for the same period last year [4] - The company is seeing a shift towards larger customers, with the number of Scalers+ customers (spending at least $100,000 annually) rising by 23% and revenue from these customers surging by 35% [4][5] Customer Base - Approximately 24% of total revenue now comes from around 500 customers spending at least $100,000 per year, while there are still 174,000 smaller customers spending at least $50 per month [5] - The net dollar retention rate improved to 99% in the second quarter, attributed to the rapid launch of over 60 new features across cloud computing and AI products [6] Financial Outlook - DigitalOcean raised its full-year revenue growth outlook to between 13.8% and 14.3%, with free cash flow margin expected to be between 17% and 19% [7] - The company is projected to generate around $160 million in free cash flow by 2025, with a market capitalization around $3 billion, resulting in a price-to-free-cash-flow ratio of just under 19 [9] Market Position - Despite a challenging economic environment, DigitalOcean's customer base is less exposed to cost-cutting measures typically seen in larger enterprise customers, which may provide a buffer during tough times [8] - The company's AI initiatives are expected to drive long-term revenue and free cash flow growth as businesses increasingly adopt AI technology [10]