DigitalOcean (NASDAQ:DOCN) stock rose 13% after it bought cloud provider Paperspace for $111 million in cash.
Paperspace is a software company that helps build and deploy artificial intelligence (AI) models. The deal is meant to position DigitalOcean, which hosts websites for small businesses, as a home for AI application providers.
DigitalOcean stock is set to open on July 7 at just over $45 per share, representing a market capitalization of $4 billion on 2022 revenue of $576 million. The company has failed to turn a profit since it came public in May 2021.
DOCN Stock: Inside an AI Play
DigitalOcean CEO Yancey Spruill did not spare any buzzwords in announcing the deal. In English, Paperspace sells graphics-heavy data services that can be used to build large language models. Spruill hopes DigitalOcean, originally a web host for small businesses, will evolve into a cloud for AI models.
DigitalOcean came public during the 2021 tech boom. The stock sold for as much as $124 per share at its peak. It now sells for less than its first trade as expenses have risen faster than revenue. Management has tried to turn the tide by buying back stock. Shares are up 77% in 2023.
DigitalOcean lost $35 million, or 37 cents per share, on revenue of $165 million in the first quarter. The loss was nearly double that of the same period last year, which the company blamed on a February restructuring. DigitalOcean is due to release second-quarter earnings on Aug. 3.
In a recent interview, DigitalOcean senior vice president Nancy Coleman predicted small businesses will soon use chatbots and data analytics in marketing but won’t use AI to replace communications. AI can create “first drafts” of ideas, she said, but final brand messaging will still be done by people.
What Happens Next?
DigitalOcean is positioning itself as an AI cloud play. But the business remains what it was two years ago — web hosting. Not all that glitters in the AI world is gold.
As of this writing, Dana Blankenhorn did not hold (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.
