Will the 2020s be remembered as the decade of the cloud? It’s entirely possible, and enterprising investors should consider DigitalOcean Holdings (NYSE:DOCN) as DOCN stock offers prime exposure to the cloud-software market.
Look, I understand if you’re skeptical. DigitalOcean was just one of numerous initial public offerings (IPOs) in 2021, and informed traders will want to know why they should pick this one.
Moreover, some folks might claim that DOCN stock went too high, too quickly after its debut. That’s a fair point, but a recent share-price pullback provided a more favorable entry point.
After learning more about this fast-growing company, some doubters might actually be persuaded to change their minds. So, let’s wade into the deep waters with DigitalOcean and see if there’s really a ground-floor, cloud-computing opportunity here.
A Closer Look at DOCN Stock
Going back to the beginning, DigitalOcean established a range of $44 to $47 for its IPO, before settling at a price of $47 per share.
On March 24, 2021, DOCN stock started trading at $41.50, which is interesting because it’s substantially lower than the IPO price.
The stock ended that first day at $42.50, thereby giving DigitalOcean a value of $4.48 billion.
That wasn’t an auspicious start, but soon the buyers would step in. Impressively, they ran the DigitalOcean share price up to $133.40 in November.
After a rally of that magnitude, a retracement should have been expected. Thus, DOCN stock pulled back to $84.04 on Dec. 3.
That’s not necessarily a bad thing if you’re just learning about DigitalOcean today, or if you’re looking to add a few shares below the peak price.
One strategy would be to take a position in the stock at the current price, and then add more shares if it goes down 10%.
Keeping It Small
While some other cloud-infrastructure providers might focus on large corporations, DigitalOcean tends to focus on smaller clients.
However, just because the customers are small, this doesn’t mean that the addressable market isn’t worth pursuing.
According to DigitalOcean CEO Yancey Spruill, the addressable market is large, with over $100 billion in annual cloud spending for small and medium-sized businesses.
“We give every customer, regardless of size, a personalized support experience,” Spruill asserted.
The company has an intriguing and very specific business model. Apparently, DigitalOcean’s revenue mainly comes from the use of “droplets,” or virtual slices of physical servers.
It’s easy to envision an underserved niche-market growth story with DigitalOcean.
After all, smaller businesses might not want to shell out the big bucks for the bells and whistles that larger cloud-architecture providers offer.
Working Toward Profitability
Before you pour your capital into DOCN stock, it’s important to analyze the company’s financials.
As it turns out, DigitalOcean’s top-line results look great, and the bottom-line stats are imperfect but improving.
Here’s the breakdown. In the first three months of 2021, DigitalOcean generated $308,899,000 in revenues. That’s a substantial increase over the $230,863,000 generated during 2020’s first three months.
Now, let’s turn to the bottom line. During 2020’s first three months, DigitalOcean recorded a net earnings loss of $29,717,000. That figure shrank to a net earnings loss of $7,378,000 for the first three months of 2021.
This is excellent progress, and suggests that DigitalOcean could achieve profitability in the near future.
Perhaps William Blair analyst James Breen had these considerations in mind when he recently initiated his coverage of DigitalOcean.
Blair issued an “outperform” rating on DCON stock, citing the company’s “differentiated platform” along with DigitalOcean’s “large and growing” addressable market.
The Bottom Line
DigitalOcean is a speculative investment in a specific sub-sector of the burgeoning cloud-software market.
Furthermore, prospective shareholders should be aware that DigitalOcean isn’t currently a profitable business.
That could change soon, though, as DigitalOcean’s revenues are growing quickly and small-scale cloud-infrastructure clients deserve attention just as much as the big ones do.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.