Representatives of the millennial generation, before becoming a client of any company, download its application. His absence can be a real reason for refusing further cooperation. For this reason, even small and medium-sized companies are trying to create their own application. When developing mobile applications, it is very costly to create a basic infrastructure for storing databases, processing and analyzing them.
Company DigitalOcean provides a ready-made platform for developing and scaling applications in any industry. DigitalOcean filed an S-1 application for an IPO on February 25, 2021. The placement itself will take place on March 23 at the NYSE, and trading will begin the day after the placement. Ticker assigned to the company “DOCN“.
Let’s see how interesting the company’s shares are to add to your investment portfolio.
As I said before, DigitalOcean is a cloud computing platform provider of any complexity. On its basis, you can deploy, manage and scale an application from different sectors of the economy. According to the company, the platform was created by “developers for developers”, that is, the company’s customers can skip the DevOps stage. Thus, development time and cost are significantly reduced, and application creators can focus on developing unique software.
The company has 14 data centers connected by a high-speed dedicated backbone. They are located in Singapore, Canada, India, New York, San Francisco, the Netherlands, the UK and Germany. This makes it possible to deploy the application in all regions of the planet at once.
Above we see the entire DigitalOcean ecosystem. The platform consists of several products, the first of which – Droplet (virtual machine) – was launched in 2012. Developers were able to launch a virtual machine in less than one minute. It provides software flexibility to build, test, secure, and scale any application.
In 2018, Managed Kubernetes was launched, a service for managing clusters (containers) of application data. Its strength is that it has become an ideal way to scale containers when streaming data. Example: regular updates to the music app. Subscription to this service costs only 10 USD per month.
The company offers database management solutions in the most popular formats: PostgreSQL, MySQL and Redis.
The DigitalOcean Marketplace was also launched, where a developer can find a “semi-finished” application in one click. There are over 150 pre-configured applications already available such as LAMP, Docker, WordPress and Plesk.
The company also conducts offline activities. Sponsored by DigitalOcean in partnership with Github and Twilio Hacktoberfes is held annually for a month – a celebration of open source software. Last year, more than 170,000 developers took part in it, which is 40,000 more than in 2019.
More than 570,000 software developers from more than 185 countries of the world have become clients of the company. Now let’s talk about competitors and market opportunities.
DigitalOcean Market and Competitors
The company operates in the IaaS (Infrastructure as a Service) and Paas (Platform as a Service) markets. According to IDC research, in 2020 their volume amounted to 44.4 billion USD, and by 2024 it may grow to 115.5 billion USD. Thus, the average annual growth rate will be 27%. Therefore, companies in this segment can grow by more than 100% annually.
Direct competitors of the company are Gossamer Threads, Linode, UpCloud, OVHcloud, iWeb Technologies, Carbon relay and Vultr… There are also such major players in the industry as Microsoft (Azure), Amazon (AWS), Oracle, IBM and Google…
Financial performance of the company
At the time of the IPO, the company does not generate net income. Therefore, we will focus on analyzing DigitalOcean’s revenue.
Above is the dynamics of the company’s sales since the first quarter of 2014. It is not difficult to see that high growth rates of this indicator were recorded even before the COVID-19 pandemic.
For 2018, 2019 and 2020, the company’s revenue amounted to USD 203.1 million, USD 254.8 million and USD 318.4 million, respectively. Growth rates in 2020 relative to 2019 amounted to 24.96%, growth in 2019 to 2018 reached 25.45%. Thus, the company’s business is growing in line with the industry market.
The company’s loss is growing much more slowly: in 2018, 2019 and 2020 it amounted to USD 36 million, USD 40.4 million and USD 43.7 million, respectively. At the same time, the gross profit for the same period amounted to USD 97 million, USD 122.2 million and USD 145.5 million. Therefore, I believe that in the near future the company will receive its first net profit.
Strengths and weaknesses of DigitalOcean
Having a complete picture of DigitalOcean’s business, let’s highlight its strengths and weaknesses. The first can include:
- The company’s products fully meet the needs of customers.
- The product is simple and intuitive.
- The company’s sales are well diversified: the share of the 25 largest customers in DigitalOcean’s revenue for 2020 is 9%.
- The transnational nature of the company’s business.
- The growth of the market in which DigitalOcean operates will amount to 27% annually by 2024 and may reach 116 billion USD.
- Own ecosystem and differentiated customer support.
- Confidentiality and protection of customer data.
- The company’s revenue grows by 25% or more annually.
- Open source allows you to quickly grow your customer base.
The risk factors for investing in securities of this company are:
- Strong competitors: Microsoft, Amazon, Google and others.
- The slightest failure in infrastructure maintenance will lead to a strong churn of customers and a drop in revenue.
- The company is unprofitable and does not pay dividends.
IPO Details and DigitalOcean Capitalization Estimates
According to the prospectus, DigitalOcean plans to sell 16.5 million shares at a price of USD 44-47 per share. The volume of funds raised will amount to USD 750 million. IPO capitalization will reach 5.5 billion USD.
The placement underwriters were Stifel, Nicolaus & Company, Incorporated, JP Morgan Securities LLC, JMP Securities LLC, KeyBanc Capital Markets Inc., Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC, JP Morgan Securities LLC, BofA Securities, Inc. and Barclays Capital Inc.
To evaluate the company, we will use the P / S ratio (multiplier) (capitalization / revenue). When hosted by DigitalOcean, it reaches 17.29. For a fast-growing sector, it can reach 25. Thus, the upside for the company’s securities can reach 47.06% (25/17 * 100% -100%).
Considering the upside potential of the stock and the company’s market prospects, I recommend that DigitalOcean be included in a long-term portfolio.
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