DOCN: Riding the SMB Cloud Wave – A Long-Term Growth Story
1. Executive Summary
DigitalOcean (DOCN) is a cloud computing platform primarily focused on serving the needs of small and medium-sized businesses (SMBs), developers, and startups. Unlike hyperscalers like AWS, Azure, and GCP which target enterprises, DOCN provides a simpler, more intuitive, and affordable cloud solution tailored to the resources and expertise of smaller organizations. Our investment thesis hinges on DOCN's ability to capitalize on the continued migration of SMBs to the cloud, driven by the need for scalability, flexibility, and cost efficiency. The company's strategic focus on simplicity and its strong developer community creates a competitive advantage, leading to sticky customer relationships and predictable recurring revenue.
DOCN has demonstrated consistent revenue growth and improving profitability, albeit with some challenges related to competition and managing operating expenses. However, the long-term growth opportunity in the SMB cloud market remains substantial. We believe DOCN is well-positioned to capture a significant share of this market due to its differentiated offering and commitment to customer success. Based on our discounted cash flow (DCF) analysis and scenario planning, we believe that at the current market price, DOCN presents a compelling long-term investment opportunity, with the potential for significant upside as the company continues to execute on its growth strategy and expand its market share. We recommend a buy rating.
2. The Business Model
DigitalOcean's business model is centered around providing cloud infrastructure and platform services to SMBs, developers, and startups. The company offers a range of services including compute, storage, networking, databases, and managed Kubernetes.
- Infrastructure as a Service (IaaS): Provides virtual servers (Droplets), block storage, object storage, and networking resources. This forms the core of their offering and allows customers to build and deploy applications in the cloud.