In partnership with

Crushing Hyperscalers Where It Matters

"The cost of running ScraperAPI would be 250% more on AWS, as compared to DigitalOcean."🤯 With revenue growing 14% YoY to $219M in Q2 2025 and a 99% net dollar retention rate, DigitalOcean is demonstrating the strength of its developer-focused cloud infrastructure platform. Trading at $27 versus DCF valuations of $32-61 per share, DOCN represents a compelling opportunity for investors seeking exposure to the high-growth cloud segment with a differentiated business model.

Why DigitalOcean's Simplicity Creates Stickiness

The Developer-Centric Value Proposition

DigitalOcean has carved out a distinctive position in the cloud infrastructure market by focusing relentlessly on developer experience and simplicity. Unlike the hyperscale giants (AWS, Azure, GCP) that offer overwhelming arrays of services designed for enterprise complexity, DigitalOcean provides a streamlined, intuitive platform that allows developers to deploy applications in minutes rather than hours.

Key B2B Use Cases:

• Startup Infrastructure: Early-stage companies can launch production workloads without DevOps expertise

• Developer Prototyping: Rapid deployment for testing and proof-of-concept development

• Small Business Applications: Web hosting, e-commerce platforms, and mobile app backends

• AI/ML Workloads: New GPU Droplets with NVIDIA H100 machines for AI development

• Managed Services: Database, Kubernetes, and monitoring solutions with minimal configuration

Go From Idea to Video in Minutes—Not Hours

Creating content daily shouldn’t feel like a full-time job.

Syllaby.io helps you generate faceless videos in just minutes—no editing, no filming, and no burnout.

✅ Auto-generate engaging short or long-form scripts
✅ Add captions, voiceovers, B-roll & character-consistent avatars
✅ Schedule and publish to TikTok, YouTube, Reels, and more

Whether you're a solopreneur or agency, Syllaby gives you everything you need to scale your content—fast.

Get 7-days free!

The Stickiness Factor: Why Customers Stay

DigitalOcean's business model demonstrates remarkable stickiness, evidenced by several key metrics from Q2 2025:

1. Net Dollar Retention at 99% - Up from 97% in Q2 2024, indicating customers are expanding their usage despite economic headwinds.

2. Scalers+ Customer Growth - The number of higher-spend customers grew 23% YoY, with revenue from this cohort representing 24% of total revenue and growing 35% YoY. ARPU for Scalers+ customers reached $30,000, up 9% YoY.

3. Community and Ecosystem Lock-in:

• Extensive documentation and tutorials lower switching costs

• Strong developer community creates network effects

• One-click installations and integrations (like Hugging Face datasets) increase platform stickiness

• Simple, transparent pricing eliminates bill shock that drives churn on other platforms

4. Technical Integration Depth: As customers build more complex infrastructures using DigitalOcean's Droplets, Kubernetes, databases, and networking tools, migration becomes increasingly costly and time-consuming.

The combination of operational simplicity and predictable costs creates a powerful moat. A ScraperAPI case study highlighted that "the cost of running ScraperAPI would be 250% more on AWS, as compared to DigitalOcean."🤯

Competitive Analysis: David Among Goliaths

The Hyperscale Competition

DigitalOcean competes in a market dominated by three giants:

Amazon Web Services (32% market share)

• Comprehensive service catalog with 200+ offerings

• Global infrastructure spanning 245+ countries

• Enterprise-focused with complex pricing models

• Recent price wars have compressed margins industry-wide

Microsoft Azure (22% market share)

• Deep integration with Microsoft ecosystem

• Strong enterprise and hybrid cloud capabilities

• Windows-focused solutions

• Complex enterprise sales cycles

Google Cloud Platform (9% market share)

• Superior AI/ML capabilities and network performance

• Strong in data analytics and container orchestration

• Limited geographic coverage compared to AWS

DigitalOcean's Differentiated Position

Rather than competing head-to-head with hyperscalers, DigitalOcean has found success by serving an underserved market segment:

Target Market Advantages:

• Developer-First Design: Simple UI that non-DevOps teams can manage

• Transparent Pricing: Fixed-rate droplets vs. complex usage-based pricing

• Linux Focus: 95% of customers use Linux, allowing optimized solutions

• Speed to Market: Deploy applications in minutes vs. enterprise sales cycles

What Clients Can Do If They Don't Choose DigitalOcean:

1. AWS Lightsail - Amazon's simplified VPS offering that competes directly with DigitalOcean Droplets

2. Traditional Hosting Providers - Companies like Linode, Vultr, or Hetzner for basic infrastructure

3. Heroku/Platform-as-a-Service - For application deployment without infrastructure management

4. On-Premises Solutions - Higher upfront costs but more control

5. Hybrid Hyperscaler Approach - Use enterprise clouds with significant DevOps investment

The Reality: While alternatives exist, DigitalOcean's value proposition becomes clear when factoring in total cost of ownership, developer productivity, and operational complexity. Most competitors either lack the simplicity (hyperscalers) or the enterprise-grade features (traditional hosts) that DigitalOcean provides.

Strategic Moats and Competitive Risks

Competitive Advantages:

• Brand recognition among developers

• Community-driven content and support ecosystem

• Operational excellence (stability and performance)

• Cost efficiency for SMB segment

Key Risks:

• Hyperscaler competition through simplified offerings (AWS Lightsail)

• Limited enterprise market penetration

• Potential margin pressure from price competition

• Dependency on Linux ecosystem (no Windows support)

Valuation: Multiple Paths to Upside

Current Trading Metrics (August 2025)

• Stock Price: $27.00

• Market Cap: $2.34B

• Enterprise Value: $3.74B

• Trailing PE: 22.67

• Forward PE: 13.67

• EV/EBITDA: 15.52

• EV/FCF: 44.73

DCF Valuation

Base Case DCF Analysis: Using Q2 2025 financials and forward projections:

Key Assumptions:

• Revenue growth: 12-15% annually (conservative vs. historical 14%+)

• Gross margin improvement: 60% → 62% over 5 years

• EBITDA margin expansion: 41% → 45% by year 5

• Terminal growth rate: 3%

• WACC: 12% (reflecting 1.76 beta and growth company risk profile)

DCF Results:

• 5-Year Cash Flow PV: $1.1B

• Terminal Value PV: $3.0B

• Total Enterprise Value: $4.1B

• Equity Value per Share: $32.93

Scenario Analysis:

• Bear Case (10% revenue growth, margin compression): $26-28 per share

• Base Case: $32.93 per share

• Bull Case (18% revenue growth, margin expansion): $45-50 per share

Sum-of-Parts Valuation

Breaking down DigitalOcean's business segments:

Core Infrastructure (Droplets, Networking): 75% of revenue

• Growing at 12% annually

• EV/Revenue multiple: 8-10x (vs. infrastructure peers)

• Valuation: $1.4-1.8B

Platform Services (Managed Databases, Kubernetes): 20% of revenue

• Growing at 25%+ annually

• EV/Revenue multiple: 12-15x (vs. platform peers)

• Valuation: $525-650M

AI/ML and Emerging Services: 5% of revenue

• Growing at 40%+ annually (early stage)

• EV/Revenue multiple: 15-20x (vs. AI infrastructure peers)

• Valuation: $165-220M

Total Sum-of-Parts: $2.1-2.7B enterprise value = $29-37 per share

Exit Multiple Analysis

Comparable Company Trading Multiples:

• Cloud Infrastructure Peers: 8-12x EV/Revenue, 15-25x EV/EBITDA

• Developer-Focused Companies: 10-15x EV/Revenue, 20-30x EV/EBITDA

• High-Growth SaaS: 12-18x EV/Revenue, 25-40x EV/EBITDA

DOCN Current Multiples vs. Peers:

• EV/Revenue (TTM): 4.6x vs. peer average of 10x

• EV/EBITDA (TTM): 15.5x vs. peer average of 22x

Potential Exit Scenarios:

• Strategic Acquisition by Hyperscaler: 12-15x revenue = $42-52 per share

• Private Equity Buyout: 20-25x EBITDA = $35-45 per share

• Public Market Re-rating: Peer multiple convergence = $35-40 per share

Valuation Summary

Fair Value Range: $32-40 per share Current Price: $27.00
Upside Potential: 19-48%

The convergence of DCF, sum-of-parts, and exit multiple analyses suggests DigitalOcean is trading at a significant discount to intrinsic value. The stock appears to be penalized for its smaller scale relative to hyperscalers, despite demonstrating superior unit economics in its target market.

Investment Thesis: Quality Growth at a Reasonable Price

DigitalOcean represents a rare combination of sustainable competitive advantages, strong financial performance, and attractive valuation in the cloud infrastructure space. The company's focus on developer experience and SMB markets provides defensive characteristics while maintaining meaningful growth optionality.

Key Investment Catalysts:

1. Continued penetration of the $60B+ SMB cloud market

2. AI/ML workload adoption driving GPU Droplet demand

3. Platform service expansion improving unit economics

4. Potential multiple re-rating as profitability scales

Risk Factors to Monitor:

• Hyperscaler competitive pressure

• Macroeconomic impact on SMB IT spending

• Execution risk on enterprise market expansion

With 14% revenue growth, improving profitability, and a conservative valuation, DOCN offers compelling risk-adjusted returns for investors seeking exposure to the cloud infrastructure megatrend with a differentiated business model. Right now it sits on my watchlist, which you can access in real-time in our community.

Would you like to stay ahead of opportunities like this? Join our community where we share real-time trade alerts and deep-dive analyses of businesses with true competitive advantages. Don't just trade the market - invest in excellence.

Want to receive our trade alerts and detailed analysis in real-time? Join our community of value investors who understand that pricing power is the ultimate competitive advantage. Receive our trade alerts on your phone? Download the app here