5 Key Reasons DigitalOcean Is Ready to Boom

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In this segment from Motley Fool Live, recorded on Jan. 6, Fool contributor Trevor Jennewine outlines several factors why DigitalOcean (NYSE:DOCN) will be appealing to investors in 2022.

Trevor Jennewine: In terms of financial performance, the company is growing pretty quickly. In the most recent quarter revenue was up 37%, $111 million. They have 598,000 customers now. That number is up 7%, and I would like to see that growing a little more quickly.

But keep in mind they’re dealing with small and medium-sized businesses. Unfortunately, those types of companies are more likely to go out of business than a larger, more established enterprise. That’s a headwind that the company will continue to deal with.

But the net retention rate in the most recent quarter was 116% which just means that the average customer spent 16% more over the past year. They’re growing their customers. The average customer is spending more, and that net retention rate of 116% was actually up from 104% in the previous year so that’s trending upward, and so you have ARPU, average revenue per user.

They actually call it average revenue per customer, but they still use the acronym ARPU, $61.97, that’s up 28% from the previous year. That’s good to see. The gross margins rising 61% in the most recent quarter up from 54%.

The company is free cash flow positive through the first nine months of 2021. All that looks good to me. DigitalOcean has a big market opportunity. They put the figure about $116 billion right now, and that’s a combination of infrastructure and platform services.

But there are 100 million small and medium-sized businesses in the world, there are 14 million new businesses that are started each year. By 2030, there’s supposed to be about 45 million developers in the world. That’s up from 19 million in 2019. The market opportunity is just getting bigger here.

The stock is down about 46% from its high. I do not currently own DigitalOcean, but this is at the very top of my watch list, and I do plan to buy the stock in the very near future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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