The Nasdaq Composite index is home to almost every stock listed on the Nasdaq exchange, so it's typically a good proxy for the performance of the broader technology industry. As of this writing, it's down by 14% from its recent all-time high, which places it firmly in correction territory.
Investors are trying to digest rising uncertainty relating to global trade policies, which could affect economic growth and corporate earnings. But throughout history, the U.S. stock market has always climbed to new highs over time, so this is probably a great long-term buying opportunity.
One stock investors might want to consider scooping up is DigitalOcean (DOCN -9.29%). It provides cloud services to small and mid-sized businesses (SMBs), but it also has a growing portfolio of artificial intelligence (AI) services, which could supercharge the company's growth going forward.
The stock is down by 26% from its 52-week high, and it's also still 73% below its record high, which was set during the tech frenzy in 2021. Let's see if the stock might be right for investors now.
Image source: Getty Images.
AI for the smallest of businesses
DigitalOcean's customer base typically includes start-ups and SMBs with under 500 employees, who require everything from simple data storage to complex software development tools. The company provides them with cheap pricing, a simple dashboard, and highly attentive support, which is useful for those without in-house technical staff.
Most SMBs wouldn't get these features from larger cloud providers like Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud, because they focus on bigger customers with higher spending potential.
DigitalOcean is now adapting its proven cloud business model to deliver AI services to its SMB customers, meaning this advanced technology is no longer reserved for the biggest tech companies with the deepest pockets. DigitalOcean offers fractional computing capacity, so SMBs can tap into between one and eight of Nvidia's industry-leading graphics processing units (GPUs). This allows them to deploy AI applications on a very small scale, like virtual assistants to serve customers, or predictive analytics to spot useful trends in their data.
Customers can also access leading third-party large language models (LLMs) from top developers like Meta Platforms, DeepSeek, and Mistral through DigitalOcean, which they can combine with their internal data to create their own AI software. These workloads also require access to GPUs.
DigitalOcean had 165,400 total customers at the end of 2024, and it said 80% of them wanted to deploy AI, but 70% were concerned about the costs involved. That's why it was important for the company to introduce affordable AI infrastructure, and it's no surprise that demand is soaring. During the final quarter of 2024, DigitalOcean said its annual recurring revenue (ARR) from AI services jumped by a whopping 160% compared to the year-ago period.
NYSE: DOCN
Key Data Points
Record revenue, and soaring profits
When DigitalOcean went public in 2021, it was using a growth-at-all-costs strategy, which often resulted in significant losses at the bottom line. But the company is now sacrificing some of that growth potential by delicately managing costs in order to improve its profitability.
DigitalOcean still managed to deliver a record $780.6 million in total revenue during 2024, but it was an increase of just 12.6%, which was slower than the growth it generated in prior years. However, it was an impressive result given that the company actually shrank its operating expenses by 2.7% in 2024, meaning most of its top-line growth was organic.
With more money coming in and less money flowing out, DigitalOcean managed to deliver a record $84.5 million in GAAP (generally accepted accounting principles) net income during 2024, which was a whopping 335% increase compared to 2023.
On a non-GAAP basis, which excludes one-off and non-cash expenses like stock-based compensation, DigitalOcean's net income was much higher, coming in at $197.5 million. Therefore, whichever way you look at it, the company is making substantial progress at the bottom line.
DigitalOcean stock might be a bargain
DigitalOcean's GAAP net income from last year translated to $0.89 in earnings per share (EPS), which places its stock at a price-to-earnings (P/E) ratio of 39.2. That isn't cheap at face value, because it's higher than the P/E ratios of cloud giants Amazon, Microsoft, and Alphabet.
DOCN PE Ratio data by YCharts.
However, 2024 was only the second year DigitalOcean generated a GAAP profit, and its eye-popping growth of 335% likely warrants a premium P/E ratio. If the company's earnings continue to grow at a similar pace, its stock would actually look like a bargain on a forward basis.
With that said, we can also value DigitalOcean stock using the price-to-sales (P/S) ratio, which divides its market capitalization by its annual revenue. It currently stands at just 4.2, which is a 29% discount to its three-year average of 5.9. That average excludes the 2021 period when DigitalOcean's P/S ratio soared to around 30, which was unsustainable.
DOCN PS Ratio data by YCharts.
DigitalOcean values its addressable market at $138 billion for this year, and estimates it could grow to $251 billion by 2028. Based on the company's revenue last year, it hasn't even scratched the surface of its potential opportunity, which makes its current P/S ratio look even more attractive from a long-term perspective.
As a result, this could be a great growth stock for investors to buy on the dip during the broader Nasdaq sell-off.
