1 Big Risk for DigitalOcean Stock – The Motley Fool


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The main selling point for DigitalOcean‘s (DOCN 1.78%) cloud computing platform is simplicity. Cloud computing giants Amazon Web Services and Microsoft Azure are great for enterprises, but for developers and small businesses with limited resources, they can be a nightmare. Hundreds of overlapping products and services introduce a steep learning curve, and pricing is often opaque and unpredictable.
DigitalOcean, in contrast, offers a small set of core cloud services with easy-to-understand pricing. It’s easy to get started, and there’s little locking customers in if they aren’t happy. With the acquisition of Cloudways, DigitalOcean is doubling down on simplicity by expanding its portfolio of managed cloud services that make life even easier for developers.
DigitalOcean’s pitch is a good one. By 2025, spending by individuals and companies with fewer than 500 employees on infrastructure-as-a-service and platform-as-a-service is expected to reach $145 billion. A big chunk of that spending will find its way to cloud platforms that don’t make things difficult, and DigitalOcean is aiming to be the top choice.
The biggest risk for DigitalOcean is not competition from AWS and other mega-platforms — it’s competition from the slew of cloud computing companies vying for the same simplicity-seeking customers.
DigitalOcean has never been entirely alone in its part of the cloud computing market. Linode, a direct competitor that offers the same style of bare-bones cloud computing, was founded about eight years before DigitalOcean. Linode was acquired by CDN giant Akamai earlier this year, combining a simple cloud computing platform with one of the leading edge computing businesses.
Privately owned Vultr, another cloud computing platform that focuses on simplicity, was started a few years after DigitalOcean. There are also many companies that offer cloud hosting in addition to their core services. Domain registrar GoDaddy, for example, sells inexpensive virtual server plans.
Long story short, if you’re a developer who needs to spin up a virtual server quickly and on the cheap, you’ve got a tremendous number of options. DigitalOcean does stand out by virtue of its immense catalog of content, guides, articles, and tutorials. A potential customer who finds DigitalOcean through its helpful content may be less likely to consider alternatives.
The bigger problem for DigitalOcean, though, may be cloud platforms that take simplicity to the next level. DigitalOcean does offer its App Platform, which allows customers to deploy apps without needing to manage servers, and Functions, which takes it a step further and allows customers to deploy smaller chunks of code. But those are features of the platform, not the guiding principle.
Once you delve into the world of cloud computing platforms that abstract away the concept of a server entirely, your options explode. Many of these platforms are ultimately powered by AWS or another larger cloud platform, which is a testament to the value customers derive from simplicity.
Heroku is the granddaddy of all these platform-as-a-service providers. The company has been around since 2007 and was acquired by Salesforce in 2011, the same year DigitalOcean was founded. Developers push their application code to Heroku, and the platform handles building and deploying the application. There are no servers to manage and minimal choices to be made.
Heroku is far from the only game in town. Similar platforms include Fly, Render, and Railway. Each of these platforms focuses on deploying apps without much fuss, and some offer services like managed databases that put everything a developer needs under one roof.
Going even further down the cloud abstraction rabbit hole, platforms like Netlify, Vercel, and Cloudflare Workers are built around cloud functions. Instead of an application running all the time in the cloud, these platforms execute chunks of code on the fly when requests come in. Customers pay only for the resources they actually use, which in some cases can be much less expensive than alternatives.
DigitalOcean finds itself in the middle ground between lumbering cloud platforms like AWS and ultra-simple cloud platforms like Cloudflare. That’s not a bad place to be, but it means that the company is going to lose out on two types of customers: companies that need advanced cloud services, and developers who want the absolute simplest experience possible.
The good news is that the market is enormous. DigitalOcean doesn’t need a dominant market share to grow its revenue into the billions of dollars in the coming years. The risk is that the company’s platform fails to appeal to too many potential customers: too simple for some, not simple enough for others.
Still, it’s hard to argue that DigitalOcean isn’t a reasonable investment, given its growth potential. Valued at around 5 times annual sales and consistently growth by more than 30% annually, you could do a lot worse than bet on this developer-centric cloud computing company.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com, Cloudflare, DigitalOcean, Microsoft, and Salesforce. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.
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