1 Growth Stock Down 30% You’ll Regret Not Buying The Dip

DigitalOcean is no ordinary cloud computing firm as you’ll see but it is down by 30% over the past 6 months, and yet appears to have significant upside potential from here.

If you’re not familiar with it, the company is like AWS or Google Cloud, but for small to medium-sized businesses (SMBs). Developers like it because of its simplicity relative to the offerings of giant tech firms, like Microsoft Azure. And unlike other cloud providers, it has streamlined solutions versus a broad gamut of applications, so it’s easier for programmers to get up and running, whether for cloud infrastructure, data storage, or application deployment.

What Makes DigitalOcean Special?

What makes DigitalOcean stand out is its unique approach to data usage. The platform collects metrics on system performance, security threats, and traffic patterns. Instead of simply letting this data accumulate, it uses the information to optimize cloud resource allocation, improve security measures, and recommend scaling strategies to customers. The SMBs can run more efficiently, which in turn fuels DigitalOcean’s own top line growth.

In the most recent financial quarter, the company reported a revenue increase of 26.8% to $169.8 million, and the number of paying customers surged to 620,000 as of the end of the last fiscal year. This rapid growth is a testament to the company’s solid retention rate of 110%, indicating that the average customer is spending 10% more than they did a year ago.

Cloud Market Set To Grow Fast

According to industry estimates, the cloud computing market is expected to reach $720 billion by 2028. That’s the quite the tailwind for DigitalOcean, which should be able to capitalize on its simplified cloud solutions to capture a respectable chunk of this market.

A primary driver for the company is its Kubernetes-based container orchestration and App Platform, which facilitate app building, deployment, and scaling. Both have enjoyed substantial customer adoption.

The burgeoning field of DevOps and cloud-native technologies only add fuel to the fire. Gartner predicts that by 2026, 75% of all businesses will be fully “cloud-native,” relying on the kind of simplified yet powerful services DigitalOcean specializes in.

The Road Ahead

DigitalOcean has a proven track record when it comes to outperforming more complex, enterprise-focused solutions. The company’s reputation for quality customer service and high transparency has translated to surprising, and impressive, win rates against competitors like Oracle and IBM Cloud.

With its focus on simplicity, cost-effectiveness, and strong community support, you can likely expect good things from DigitalOcean in the coming years and yet the share price is in the red for the year, and down a massive 30% in the last six months alone.

Is DigitalOcean’s Stock Valuation Justifiable?

Currently, DigitalOcean trades at approximately 3.3 times last twelve months sales, not a particularly high multiple by any means for the space in which it plays.

Analysts appears to be bullish too, placing a $36 price target on the stock. That aligns with our own calculations which put fair value at $34.64, which if realized would translate to 44.6% upside from current levels.

Revenue forecasts place 2025 numbers at $864 million, up from $576 million at the end of the most recent fiscal year. Critically, that should turn operating income positive to the tune of $216 million versus -$27 million last year.

At a $2.1 billion valuation now, trading at 10x 2025 operating income doesn’t seem too expensive at all. In fact, it’s downright cheap for such a fast growing company with so many tailwinds.

Conclusion

With its unique focus on simplicity and customer-centricity, backed by increasingly strong financials and a thriving market opportunity, DigitalOcean is the type of growth stock you may very well regret not buying on the dip.