The cloud computing industry is dominated by giants like Amazon, Microsoft, and Alphabet, but those providers typically focus on the largest and highest-spending enterprises. Tailoring their cloud services to small and medium-sized businesses (SMBs) wouldn't be an economical strategy, because those customers wouldn't contribute enough revenue to move the needle.
DigitalOcean(NYSE: DOCN), on the other hand, focuses exclusively on providing cloud services to SMB customers. Plus, it has a growing portfolio of artificial intelligence (AI) services that are helping even the smallest businesses adopt this revolutionary technology.
DigitalOcean stock is down 76% from its record high, which was set during the tech frenzy in 2021. The stock was undeniably overvalued then, but it's starting to look very attractive, especially in light of the company's accelerating revenue growth and soaring profits. Here's why investors might regret not buying the dip.
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Delivering AI to small and medium-sized businesses
DigitalOcean provides a range of cloud services to more than 600,000 customers, from simple data storage and website hosting to complex software development tools. It differentiates itself from the larger cloud platforms by offering cheap and transparent pricing, highly personalized support, and simple deployment processes. These attributes are suited to SMBs, especially those without in-house technical expertise.
DigitalOcean is now helping SMBs access the power of AI. It operates data center infrastructure fitted with graphics processing units (GPUs) from top suppliers like Nvidia and Advanced Micro Devices. In order to keep prices down, DigitalOcean doesn't use the latest GPU variants, but it does offer Nvidia's H200 and AMD's MI300X, which can deliver more than enough computing power for moderate AI workloads.
Plus, DigitalOcean offers fractional capacity, meaning SMBs can access between one and eight GPUs at a time. This is ideal for small businesses that might want to deploy an AI chatbot on their website to handle customer service inquiries, for example. That kind of workload doesn't require thousands of Nvidia's latest Blackwell GPUs, which is what the bigger cloud platforms are focused on providing.
In January this year, DigitalOcean also launched a new platform called GenAI which allows SMBs to create custom AI agents to serve customers, onboard new employees, and even generate business insights from internal data. These agents are built on the latest large language models (LLMs) from top developers like OpenAI, Anthropic, and Meta Platforms, which are among the most complex in the world.
The GenAI platform is still in beta mode, but DigitalOcean says 5,000 customers have already used it to deploy over 8,000 AI agents so far.
Accelerating revenue growth and soaring profits
DigitalOcean generated $210.7 million in total revenue during the first quarter of 2025 (ended March 31), which was a 14% increase from the year-ago period. That growth rate accelerated for the second consecutive quarter, which is a sign that momentum is building, and AI is a key reason why.
Although DigitalOcean doesn't disclose exactly how much revenue its AI services generate, the company said it grew by an eye-popping 160% year over year during Q1. But it gets better -- management says demand for GPU capacity continues to outstrip supply, so investors should expect rapid growth from the AI business for the foreseeable future.
DigitalOcean's Q1 results were even more impressive when you consider that it slashed its total operating expenses by 6% to improve its bottom line. In other words, the company could be growing its revenue even faster by investing more aggressively in costs like marketing, which would attract more customers.
But the strategy worked like a charm. DigitalOcean's net income (profit) soared by a whopping 171% to $38.2 million during the quarter, which translated to $0.39 in earnings per share (EPS).
DigitalOcean stock looks like a bargain
When DigitalOcean stock peaked in 2021, it was trading at a lofty price-to-sales (P/S) ratio of around 30, which was unsustainable. The 76% decline in the stock since then, combined with the company's consistent revenue growth, has pushed its P/S ratio down to just 3.7. That's actually a 34% discount to its three-year average of 5.6, which excludes the 2021 period.
Now that DigitalOcean is consistently profitable, we can also measure its valuation using the price-to-earnings (P/E) ratio. Based on the company's trailing 12-month EPS of $1.11, its stock trades at a P/E ratio of 27.6, which is near its cheapest level since it went public four years ago.
The Nasdaq-100 index trades at a P/E ratio of 29.3, so DigitalOcean is cheaper than a basket of the world's biggest technology stocks (which includes many of the top providers of cloud and AI services).
DigitalOcean values its addressable market at $400 billion this year, so it hasn't even scratched the surface of its opportunity. Considering the rapid growth of its AI revenue, its soaring earnings, and its valuation, investors might regret not buying the stock today when they look back on this moment in a few years' time.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, DigitalOcean, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
