DigitalOcean (DOCN): Assessing Valuation After Beating Revenue Expectations With AI and Cloud Growth

DigitalOcean Holdings (DOCN) is back in the headlines after delivering revenue numbers that topped expectations, with particular strength coming from its AI and core cloud segments. While the company’s growth did not quite match the pace of some major names in the data storage space, its ability to beat forecasts is a clear signal for investors that DigitalOcean’s business model is holding up in a fast-evolving market. This mix of exceeding expectations but trailing some rivals creates an interesting setup for anyone watching the stock, especially as AI spending continues to shape the tech landscape.

Looking at the bigger picture, DigitalOcean’s shares have seen a rollercoaster ride. Despite a jump of 16% over the past month and more than 30% over the past 3 months, the stock has still lost about 11% over the last year. This recent momentum stands out given a modest 7% gain since the start of the year and flat performance over a three-year stretch. Compared with the strong results at Snowflake and MongoDB, it is clear that DigitalOcean is keeping pace on core growth without hitting quite the same highs.

So, after this swing in performance and fresh optimism around AI, the key question is whether DigitalOcean remains positioned for future growth or if the market has already absorbed the positive developments.

Most Popular Narrative: 26.9% Undervalued

According to Nenad, the prevailing narrative now points to DigitalOcean being significantly undervalued, with its growth prospects tied closely to evolving AI capabilities and SMB cloud demand.

As more small businesses digitize, the need for simple, cost-effective cloud services will grow. DigitalOcean can expand its market share by capturing these first-time cloud users.

Looking for the secret driving such a bullish fair value? The narrative highlights an ambitious financial roadmap that depends on new product lines and customer monetization. If you want to discover the aggressive growth estimates and the optimism surrounding global expansion, you will want to explore the specifics behind this valuation story.

Result: Fair Value of $50 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, strong competition from larger cloud providers and the challenge of keeping churn low among SMB customers could still threaten this optimistic outlook.

Find out about the key risks to this DigitalOcean Holdings narrative.

Another View: What Does Our DCF Model Say?

While the first narrative paints DigitalOcean as undervalued, our DCF model tells a different story and suggests the current share price may actually be higher than its fair value. Does this challenge the bullish view, or simply point to shifting assumptions about the company's growth?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out DigitalOcean Holdings for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own DigitalOcean Holdings Narrative

If you see things differently or want to dig into the data yourself, it is easy to explore your own findings and shape a unique perspective in just a few minutes. Do it your way

A great starting point for your DigitalOcean Holdings research is our analysis highlighting 4 key rewards and 2 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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