Amazon AWS, Microsoft Azure, and Google Cloud continue to dominate the massive and still-expanding cloud computing industry. When migrating operations to the cloud, one of these companies will likely play the most prominent organizations worldwide.
However, DigitalOcean, which recently went public, is making waves by focusing on a different economic segment: small and medium-sized businesses (SMBs), start-ups, and individual developers. There is a huge growth in this space, and DigitalOcean is moving quickly.
Here are three reasons why this technology platform could become a household name in the cloud industry within the next decade.
DigitalOcean provides services to the forgotten and underserved:
A lot of today’s high-end technology was designed with large corporations in mind. There’s a good reason for this. It’s because large enterprises spend the majority of global IT spending, as DigitalOcean CEO Yancey Spruill pointed out in a recent conversation. The nascent cloud industry is no exception. To get the most ROI, tech companies have primarily developed products and go-to-market strategies aimed at the most influential organizations. Even though the cloud is efficient, simplifies operations, and theoretically makes participating in the digital economy more accessible than ever, small and medium-sized businesses (SMBs) continue to be an underserved segment of the economy.
SMBs aren’t precisely a “niche” market. On the contrary, they account for roughly half of total GDP. According to Spruill, the problem is that they are widely distributed all over the place, with approximately 100 million SMBs worldwide, and typically spend a small amount on technology on an individual basis. Small businesses and aspiring entrepreneurs would benefit the most from the cloud’s arrival. However, a better platform that addresses their specific needs (primarily affordability and ease of use) is required to support them.
This is where DigitalOcean enters the picture. According to DigitalOcean, SMBs (those with fewer than 500 employees) will spend $44 billion on cloud infrastructure and platform services in 2020, according to a study conducted by researcher IDC. However, that figure is expected to rise to $116 billion per year by 2024, representing a 27 percent annual growth rate. With annualized revenue of only $426 million in Q2 2021, DigitalOcean has a vast opportunity to grow alongside SMBs and other aspiring digital entrepreneurs in the years ahead.
DigitalOcean‘s revenue is increasing quickly and steadily:
DigitalOcean‘s platform, which aims to tear down the barriers that prevent SMBs and entrepreneurs from participating in the digital economy, has a large following. It had a massive user base of over 600,000 customers spread across 185 countries as of Q2 2021. And, because DigitalOcean is designed to be affordable (as little as $5 per month for a pre-formatted app hosted by DigitalOcean) and to scale if a developer’s idea takes off, this is a story about increasing usage from existing customers as much as it is about acquiring new customers.
As a result, the company is steadily expanding at a rapid pace. Revenue increased by 35% year on year to $104 million in Q2, compared to a mid-20% growth rate in 2020. Part of the acceleration in the top line is undoubtedly the result of a leisurely lap of last year’s results during the pandemic’s start. However, Spruill stated on the most recent earnings call that a steady increase in new customer acquisitions (targeted at a minimum of 10% growth) and average revenue per user (expected change in the mid-teens percentage rate) gives DigitalOcean confidence that it can maintain a 30% or higher sales pace for the remainder of 2021 and into 2022.
The stock is valued at slightly more than 13 times trailing 12-month revenue. If DigitalOcean maintains its current growth rate, that appears to be a great long-term value – not to mention that it would put this cloud platform on track to reach $1 billion in annualized sales within a few years.
DigitalOcean has an excellent business model and a strong balance sheet to back it up:
DigitalOcean has a highly efficient business model due to the way it is structured. According to Spruill, its cloud platform is built with open-source software. The company has many tutorials on its website to assist developers of all types – even those who do not use DigitalOcean. Every month, the company receives approximately 5.5 million site visits and thousands of developers who arrive via a tutorial end up converting into customers. And, developers and SMBs tend to have close-knit circles of colleagues with whom they share ideas, generating excellent word-of-mouth marketing.
As a result, DigitalOcean spent only 11 percent of total revenue on sales and marketing in Q2 (or 9.5 percent when non-cash employee stock-based compensation is excluded), a figure typically ranges from 20 to 30 percent for similar high-growth cloud firms. This is a well-run company that, despite its small size, is already profitable. In Q2, the adjusted EBITDA profit margin was 30%, and free cash flow generated through the first half of 2021 was $13 million.
With $577 million in cash and equivalents and zero debt as of the end of June, DigitalOcean is in excellent shape to continue growing alongside its SMB and aspiring entrepreneur users.