Investors Eye AI: DigitalOcean’s Growing Potential as 2025 Approaches

As 2024 draws to a close, savvy investors are starting to consider which stocks to hold heading into the new year. Current trends suggest that artificial intelligence (AI) will remain a significant force in the market throughout 2025, providing a compelling reason to focus on companies making strides in this area.

DigitalOcean (NYSE: DOCN) is a mid-cap firm specializing in cloud computing services for small and mid-sized businesses (SMBs). The company is expanding its offerings with robust AI services, utilizing advanced data center infrastructure built on industry-leading chips from Nvidia.

At this moment, DigitalOcean’s stock is trading close to its all-time low as a public entity, based on one common valuation measure, making it a potentially attractive buying opportunity.

Image source: Getty Images.

Finding Space Among Giants

In the global cloud services market, the top contenders are Amazon Web Services, Microsoft Azure, and Alphabet‘s Google Cloud. With a market cap below $4 billion, how does DigitalOcean position itself to compete against these multi-trillion-dollar titans?

The answer lies in its focus on a niche market largely ignored by larger firms—businesses with fewer than 500 employees, particularly those in the start-up phase. While the cloud giants pursue larger clients that spend heavily, DigitalOcean tailors its services for smaller enterprises.

With transparent pricing, personalized customer support, and user-friendly deployment tools, DigitalOcean meets the needs of SMBs that often lack extensive technical staff. Remarkably, 474,000 out of 638,000 customers spend an average of just $15 per month with DigitalOcean. The company hopes some of these will eventually grow into “scalers,” who typically spend around $2,153 each month.

Currently, about 18,000 scalers contribute to more than half of DigitalOcean’s revenue, highlighting the potential for growth within this market.

DigitalOcean Enters the AI Arena

Last year, DigitalOcean expanded its capabilities with the acquisition of Paperspace, a data center operator focused on AI development. They provide flexible billing options with no long-term contracts, making them a favorable choice for SMBs looking to integrate AI—often at prices up to 70% lower than Microsoft Azure.

While major players like Azure offer servers loaded with thousands of Nvidia GPUs, smaller businesses typically do not need this level of computational power. In response, DigitalOcean has begun allowing customers to utilize fractional GPU capacity, enabling them to access between one and eight Nvidia H100 GPUs. This feature opens the door for even the smallest companies to adopt AI technologies.

Such fractional GPU offerings are rare in the industry, and it’s unlikely that larger cloud providers will focus on this scale, giving DigitalOcean a unique advantage. Initial demand has been promising.

In the third quarter, DigitalOcean reported a record $198.5 million in revenue, reflecting a 12% rise from the same period last year. Notably, the company’s AI revenue surged by nearly 200%.

Valuation: DigitalOcean’s Stock Position

DigitalOcean has only recently achieved consistent GAAP profits, so it may be premature to value its stock using the traditional price-to-earnings (P/E) ratio. However, they earned $0.87 in trailing twelve-month earnings per share (EPS), meaning that at a current stock price of $38.50, their P/E ratio stands at 44.2.

This ratio appears high next to the tech-heavy Nasdaq-100, which holds a P/E of 33.1. Yet, DigitalOcean experienced an exceptional 1,650% year-over-year growth in EPS within the first nine months of 2024. If this growth trend persists, their stock could become comparatively more affordable by 2025.

A more suitable measure for value right now may be the price-to-sales (P/S) ratio. With 12-month revenue of $756.6 million and its current market cap, DigitalOcean’s stock carries a P/S ratio of 4.8. This is near its lowest point since going public in 2021 and represents a 43% discount from its average P/S ratio of 8.5.

DOCN PS Ratio data by YCharts.

According to IDC, the current annual worth of the cloud market for SMBs is $114 billion, indicating DigitalOcean still has significant room for growth. The firm expects this market to reach $213 billion by 2027, propelled by the AI boom that could potentially boost this figure into the trillions. Wall Street forecasts suggest AI might add between $7 trillion and $200 trillion to the global economy in the next decade, and DigitalOcean stands to capture a substantial portion of the SMB sector.

Given these elements, investors in search of a new AI opportunity for 2025 should strongly consider DigitalOcean.

Thinking of Investing $1,000 in DigitalOcean?

Before proceeding to buy DigitalOcean stock, take this into account:

The Motley Fool Stock Advisor analyst team has recently pinpointed ten other stocks they recommend investing in right now, and DigitalOcean is not among them. These chosen stocks are poised for significant returns in the years ahead.

Remember when Nvidia was recommended on April 15, 2005? If you invested $1,000 at that time, you would have seen it grow to $904,692!*

Stock Advisor offers a clear and accessible guide for investors, including advice on portfolio building and regular updates. Additionally, the service provides two new stock picks each month, boasting a return that has more than quadrupled the S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 11, 2024

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 also a board member. Anthony Di Pizio does not hold any positions in the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, DigitalOcean, Microsoft, and Nvidia. They also recommend 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.