Provider of cloud computing platforms DigitalOcean (NYSE: DOCN) has had a forgettable year in the stock market so far. The stock fell 10% after DigitalOcean announced its third-quarter results on November 4. And so far in 2024, shares are up just 7%.
But it seems the market is underestimating the cloud computing provider’s massive growth potential and the healthy results it has been posting lately. A closer look at the company’s results shows that its recent performance did not merit such a sell-off.
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Let’s look at the reasons why.
DigitalOcean is growing at a healthy pace and AI could give this a nice boost
DigitalOcean’s Q3 2024 revenue rose 12% year over year to $198 million, while adjusted earnings grew 18% from the year-ago quarter to $0.52 per share. The company’s revenue exceeded the expected range of $196 million to $197 million, while operating income significantly exceeded the estimated earnings per share of $0.40.
In fact, DigitalOcean has raised its expectations for the full year. It expects to end the year with revenue of $776 million, up from its previous guidance of $772.5 million. Non-GAAP (adjusted) earnings are now expected to be in the range of $1.70 per share to $1.75 per share, compared to the prior guidance of $1.60 per share to $1.70 per share.
So it was baffling to witness a sell-off in DigitalOcean stock after the beat-and-raise quarter, especially considering that the company’s focus on offering cloud-based artificial intelligence (AI) solutions would should help win a larger share of customers. purses. DigitalOcean’s cloud computing platform is used by startups, developers, and small and medium-sized businesses, with the company providing both infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) solutions.
Customers use DigitalOcean’s platform to build, scale and deploy applications, while also purchasing networking, compute and storage services from the company. And now DigitalOcean also offers virtual machines, powered by Nvidia‘s popular H100 graphics processing units (GPUs) through a service known as GPU Droplets.
This is an on-demand service that gives customers access to DigitalOcean’s GPU infrastructure for training and deploying AI models, data analytics, deep learning and high-performance computing. DigitalOcean says this on-demand offering can be accessed for $2.99 per GPU per hour, and customers can scale up as needed.
With GPU Droplets, users can create chatbots, train large language models (LLMs), and generate images and video, among other things. Additionally, DigitalOcean recently launched a generative AI product known as GenAI Platform, which allows users to build AI agents using the GPU infrastructure. Through this offering, the company gives customers access to popular models such as Llama 3.1 and Mistral NeMo, which customers can use to create custom AI agents using their own data.
These are smart moves by DigitalOcean to tap into the fast-growing AI market. The customers do not have to spend a lot of money to train and deploy AI models as the company provides them with access to powerful GPUs while allowing them to create and customize applications using fundamental models.
The great thing is that this strategy seems to lead to an increase in customer spending. The company’s average revenue per user (ARPU) rose an impressive 11% year over year to $102.51 in Q3 2024. It’s worth noting that DigitalOcean’s ARPU increased as the year progressed, from $95.13 in the first quarter to $99.45 in the second quarter and to triple digits last quarter.
It will come as no surprise that this trend will continue in the future, as the company expects a healthy increase in its market opportunities going forward. DigitalOcean points out that cloud spending by individuals and companies with fewer than 500 employees could reach $114 billion by 2024 and grow 23% annually to $213 billion by 2027.
The integration of AI tools within the cloud computing platform could accelerate growth and lead to better growth prospects for the future. Therefore, it may be a good idea to buy the shares right now.
Why you should consider buying this stock now
DigitalOcean currently trades at 21 times forward earnings, meaning it can be bought at a discount to the tech-heavy market. Nasdaq-100 index’s forward earnings multiple of almost 30. Buying this AI stock at this valuation could be a smart move as the company’s earnings growth is expected to improve going forward.
DigitalOcean’s 2024 earnings estimate points to a potential increase of 8.5% from 2023’s $1.59 per share. However, the forecast for the coming years suggests that net growth will eventually accelerate in 2026 to double figures.
Furthermore, consensus estimates predict that DigitalOcean’s revenues will grow at nearly 14% annualized over the next five years, although it won’t be surprising to see the company outperform, thanks to a new catalyst in the form of AI. . Investors looking to buy a technology stock that trades at an attractive valuation and could see AI-powered momentum in the long term should consider taking a closer look at DigitalOcean after its latest pullback.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends DigitalOcean and Nvidia. The Motley Fool has a disclosure policy.
This Artificial Intelligence (AI) Stock Looks Like a Top Buy After Latest Pullback Originally published by The Motley Fool
