The Worst Mistake DigitalOcean Investors Can Make Right Now
Actions of DigitalOcean (NYSE: DOCN) performed incredibly well in 2021, but recently they’ve started to slip. Over the past month, stocks have fallen by more than 40%, mainly because the tech sector as a whole has been crushed in recent months.
However, the performance of the share price is not indicative of the performance of the company. In fact, DigitalOcean works extremely well. While falling stock prices can be of concern to many investors, dumping stocks just because stock prices are falling could be a costly mistake.
In an internal study, DigitalOcean found that 13% of small and medium enterprises (SMEs) say technical training and cloud education is a barrier to cloud adoption, and cloud offerings like Amazon Web Services (AWS) did not help resolve this issue. Solutions like AWS are very technical and complex because they are designed for professionals, but SMBs and independent developers are often more new to the cloud and uncomfortable using these solutions.
DigitalOcean offers a cloud offer specifically for SMEs, based on simplicity, transparency and a community of expert developers available to help SMEs. The company offers basic offerings such as “droplets” – small, easy-to-run servers that can be started in seconds – as well as application development tools. Its pricing models are transparent and clear, and the company provides access to tutorials and how-to videos from a wide variety of cloud experts to help its customers learn.
Even though AWS and other competitors have offerings designed specifically for SMBs, they fail to deliver these critical aspects. As a result, DigitalOcean has become the leading cloud provider for small businesses. The company has nearly 600,000 customers worldwide, which has enabled it to achieve accelerated quarterly revenue growth and 12-month revenue of $ 396.4 million.
DigitalOcean has also done a remarkable job of increasing its relationships with customers by bringing them deeper into the product ecosystem. SMBs are known to have a higher churn rate than businesses due to their smaller budgets, but DigitalOcean has done a great job of retaining customers. The company lost just 4,000 customers from Q2 to Q3 2021, but while that sounds like a lot, it’s less than 1% of its total customer count. With this low churn rate, the company was also able to increase customer spending. Its net retention rate is 116%, which means that by including customers who no longer spend anything, Q3 2020 customers are now spending 16% more. This shows investors that DigitalOcean has been successful in retaining customers and integrating them deeper into the ecosystem, a difficult thing to do in the SMB market.
Why selling can be expensive
Despite the decline in stocks over the past month, it’s important to zoom out. Since its IPO in early 2021, the stock has risen 71%. Therefore, you could lose money on paper today, but you are probably green on your investment. In a volatile market, it’s always important to zoom out and look at the larger trend, and DigitalOcean is no exception.
Even though the business is growing rapidly, there is still amazing growth to come. DigitalOcean estimates that there are 100 million SMEs in the world and that an additional 14 million SMEs will be born each year. With this, DigitalOcean’s addressable market is expected to nearly triple to $ 116 billion by 2024. With less than $ 400 million in revenue over the past 12 months, DigitalOcean’s growth opportunities are vast.
As if the story couldn’t be better, the business pays off. Most companies that are growing 35% year over year with huge addressable markets ahead of them are bleeding money, but DigitalOcean has been able to achieve a net income margin of 2, 4% so far this year. This balance the company has struck between investing in research and development while providing cash to the bottom line demonstrates management’s allocation expertise – something that will no doubt be of great benefit to the company over the course of time. of the next decade.
The right move
While it may be difficult to weather this crisis in the week, month, or maybe even year ahead, your future self will thank you. The volatility of your portfolio can be hard to bear, but that’s the price of going public.
DigitalOcean has built a platform that some of the best companies in the world have failed to reach, which has enabled it to become the leading cloud provider for SMBs. With this title and impressive brand loyalty from a consumer base notoriously independent of the brand, the company has the potential to become a giant in the SME market. While it may be difficult to own stocks now, I believe that overcoming this volatility will be extremely profitable in the future.
For more aggressive investors, it may even be time to strengthen your position. The company is trading at 17 times sales, which is not that expensive for tech stocks. Another company that focuses on SMEs, Shopify, is trading at 38 times sales. Meanwhile, DigitalOcean’s valuation has grown from 30 times sales earlier this year to around 16 today. I think this decline and the positive financial backdrop is an attractive opportunity to add shares of this innovative company to most portfolios.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.