DigitalOcean (NYSE: DOCN) stock peaked more than three years ago. After the stock price made a sharp reversal beginning in late 2021, its potential for investor returns seemed to have vanished, as its stock lost more than 70% of its value.
In addition to the bear market, slowing growth and the rise of artificial intelligence (AI) added to the uncertainty. Those struggles are the likely reason DigitalOcean replaced CEO Yancey Spruill with Paddy Srinivasan.
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Since Srinivasan took the helm, the company has focused on AI, and it now appears poised for a dramatically improved financial performance. Amid those improvements, 2025 could be the year DigitalOcean stock finally recovers. Here's why.
Where DigitalOcean stands in the marketplace
Investors who know little about DigitalOcean may wonder what makes it stand out from cloud and AI giants such as Amazon's AWS or Microsoft's Azure. Unlike these industry leaders, DigitalOcean differentiates itself by bringing simplicity to the cloud and AI, so developers and entrepreneurs can free their time for other pursuits.
To this end, DigitalOcean targets small and medium-sized businesses (SMBs). It does this through transparent pricing that allows businesses to buy only the services they need. Additionally, the DigitalOcean community consists of other participants and a library of IT documentation. This makes it easier for under-resourced developers and business owners to solve IT-related problems quickly and cheaply.
Furthermore, DigitalOcean enhanced its AI capabilities by purchasing Paperspace in 2023. Paperspace allows users to build and scale accelerated computing applications that will not run on a company's systems. Thus, users can benefit from AI without having to make massive investments in the technology.
Such advancements have amounted to a competitive advantage for DigitalOcean. Large players tend to target more massive enterprises with more extensive needs. This leaves them unable to copy DigitalOcean's approach without undermining their business models.
Moreover, a new entrant would likely struggle to compete with the DigitalOcean community without a considerable investment. Thus, the company should prosper within its niche.
Additionally, DigitalOcean forecasts a compound annual growth rate (CAGR) of 23% on its part of the cloud market through 2027. If its financial performance can come close to matching this prediction, it should bode well for the company's stock.
Continuously improving financials
Indeed, DigitalOcean's financial performance continued to improve, though maybe not as fast as its CAGR indicates. The company's revenue rose 34% in 2022, and even though revenue increases slowed to 20% in 2023, that was the year it turned profitable, reporting just over $19 million in net income.
However, its revenue of $576 million in the first nine months of 2024 grew by only 12% yearly, which may have led to investors turning on the stock, given the company's growth forecasts.
Still, net income for that time frame rose to $66 million. Moreover, analysts forecast 13% revenue growth in 2025, indicating the growth rate has stopped slowing and may even be ready to reaccelerate.
Furthermore, the company's valuation metrics appear favorable for new investors. Its P/E ratio is 41, a low level considering how recently it turned profitable. Also, the forward P/E ratio of 19 is likely too low for the stock if its yearly revenue growth is in the low teens or higher.
Is DigitalOcean stock a buy in 2025?
Considering the company's track record and forecasted growth in the cloud and AI industries, 2025 could bring a turnaround in DigitalOcean stock.
Admittedly, the slowing revenue growth points to possible concerns, especially since revenue growth is on track to lag its own estimates for industry growth. Also, the need to compete in AI and the CEO change in 2024 may have contributed to investor uncertainty.
Nonetheless, the low forward P/E ratio likely accounts for these challenges, and then some. Additionally, revenue growth in the low teens is likely enough for its massive profit growth to continue for the foreseeable future. These factors that should help make 2025 a profitable year for DigitalOcean shareholders.
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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. Will Healy has positions in DigitalOcean. The Motley Fool has positions in and recommends Amazon, DigitalOcean, and Microsoft. 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
