DigitalOcean Holdings(DOCN)

DigitalOcean Holdings, Inc.

Stock: DOCN

Rating: Good

Author: Waleed M. Tariq

Summary

  • DOCN’s 60% drop since December’s peak is a buying opportunity.
  • Growth estimates are realistic.
  • The current price is attractive.

Bullish

  • DOCN’s distinctive qualities should help it in a competitive market.
  • DOCN is an exceptional stock with unique qualities that should boost its growth.
  • I believe customer retention drives revenue growth. DOCN’s 4Q21 ARPU rise of 29% affirms this.

Bearish

  • Pandemic has affected small firms hard, and thus DOCN is still battling these effects.

Simplicity’s value

  • DOCN prioritizes SMBs. These non-tech companies are online. Since SMBs had to get online or die, e-commerce has flourished.
  • DOCN simplifies the process for technophobic entrepreneurs with amazing ideas. IT workers decipher AWS and AZURE’s platforms. DOCN is SMB-friendly.

Beginner-friendly ecology

  • DOCN offers a nurturing atmosphere through its tutorials and development community. Even a simple platform will have challenges.
  • DOCN contains thousands of videos and resources for developers. Amazon doesn’t offer this value.

Pricing transparency

  • SMBs fear fees. Buying only what you need is smart.
  • DOCN’s pricing is clear. Customers may predict expenses and pay for what they want, increasing loyalty.

SMB market characteristics

  • Consider DOCN’s market to gauge growth.
  • DOCN’s 4Q presentation projects the SMB market to grow 27% to $145 billion by 2024. This growth can benefit DOCN.
  • DOCN’s 30 percent revenue growth plan for 2022 requires significant market growth rates, not market share. $72 billion is peanuts.
  • The company’s 37% quarterly revenue growth may be helped by the first-mover advantage.

Fourth-quarter results don’t lie

  • DOCN’s important KPIs (latest 4Q) are:

Annual revenue

  • Management’s goal is $1 billion by 2024. Revenue grew 37% year-over-year in Q4.

EBITDA Margin

  • Fast-growing DOCN is profitable. In Q4, the company earned $37.8 million in adjusted EBITDA, a 31% margin, proving its business model.

Customer additions driving NDR and ARPU

  • DOCN has 600,00 users. On a micro level, the consumer base’s make-up looks encouraging. DOCN’s platform has attracted large and rising SMBs.
  • Larger customers make up 15% of the customer base but contribute 85% of the revenue. This shows that SMBS is flourishing on DOCN’s platform and driving average user reviews (ARPU).
  • Larger customers have driven 50% ARPU growth and 118% NDR. Average ARPU and NDR for Q4 are 29% and 116%, respectively.

Increasing NDR and Average Revenue per User

  • More customers grow faster, argues management. DOCN goes to larger NDR clients. This will boost customer income. This meets management’s 30% revenue goal.
  • The 116% increase in NDR suggests customers are spending more. Retention promotes revenues. DOCN 4Q21 ARPU up 29%.

Conclusion

  • As per TipRanks, the mean target price is $92.17, meaning a 65% upside over the next year. Given the stock’s quality and management’s reputation, this seems reasonable.
  • DOCN’s recent share price drop and 4Q results give an attractive buying opportunity.