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2 Big Reasons to Buy DigitalOcean Stock for the Long Term

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The cloud computing industry is set to boom, and DigitalOcean is competing with giants.

The technology sector has a reputation for high growth, as innovative companies in indexes like the Nasdaq 100 specialize in building products and services that solve important problems and do it in a way that's significantly scalable. This has helped the tech-centric Nasdaq 100 to grow at twice the rate of the broader S&P 500 over the past decade (up 444% versus 221%, respectively).

Looking forward to the next decade, companies managing cloud services will likely keep this outsized growth trend among tech companies going as more of the economy transitions into the digital realm. DigitalOcean (DOCN -3.42%) is one of those cloud services companies and it recently reported its full-year 2021 earnings. That report helped reinforce two big reasons this stock is worth owning, especially for the long run.

Image source: Getty Images.

1. DigitalOcean is winning on the price it charges customers

Ensuring that small enterprises, including start-ups, have affordable access to cloud services is a crucial part of securing sustainable growth for the digital economy. The most innovative technologies are now built using cloud-based tools, whether it's the development of games, mobile applications, or software services. 

The cloud computing industry is currently dominated by the tech giants Amazon (AMZN 4.40%), Microsoft, and Alphabet's Google, but DigitalOcean has mounted a credible challenge. It's focusing its services on individuals and smaller businesses, which might feel like their needs are ignored by the much larger competing providers whose services only become affordable in large-scale settings. DigitalOcean has built a user interface suited to its target market, with a host of one-click features that make deployment simple and easy. But its biggest point of difference is price.

Deploying an 8-CPU basic virtual machine using DigitalOcean can be up to 33% cheaper than the equivalent at Amazon Web Services. And it gets even better for organizations as they scale up, those requiring maximum processing power and storage can save up to 56% with DigitalOcean when compared to Amazon. 

The company is also crushing the competition with its stand-alone bandwidth pricing, which comes in at just $0.01 per gigabyte per month, 80% cheaper than its closest competitor. And as an entry point, it doesn't get much better for start-ups, with monthly plans beginning at $0 to $15, regardless of the technology they're trying to build. 

2. DigitalOcean has an enormous addressable market

Some estimates suggest the cloud computing industry could be worth $483 billion in 2022 alone, with a 15.7% compound annual growth rate that would boost the figure to $1.55 trillion by 2030. DigitalOcean's focus on small- to mid-size organizations means it's only tapping into a fraction of that addressable market, but it still affords the company a long runway for growth.

DigitalOcean values its opportunity at $72 billion in 2022 and expects that to more than double to $145 billion by 2025. It represents a compound annual growth rate of 27%, suggesting that the company's target segment is actually growing much faster than the cloud industry overall.

Given that the company generated just $429 million in revenue during 2021, investors could be in for a fruitful ride over the long term as DigitalOcean claims further market share.

Over 609,000 businesses used DigitalOcean in some capacity in 2021, and more than 99,000 of them are spending greater than $50 per month. More impressively, the company reported that its average revenue per user hit another all-time high of $65.87 at the end of the year, representing 28% growth compared to the end of 2020. 

Buy DigitalOcean for the long run

While DigitalOcean stock has been crushed amid the broader tech sell-off, losing 54% of its value since hitting its all-time high in November 2021, there's no doubt the company is firing on all cylinders. It's attracting more customers, who are spending increasing amounts of money, and that resulted in an improved gross profit margin in 2021 compared to 2020.

Speaking of profits, it is important to note a drawback regarding DigitalOcean at the moment: It isn't net profitable just yet. That's what makes the company a stronger bet over the long term, as opposed to the short run. It has a large market to grow into, and as it further expands its customer base, it will eventually achieve scale and generate earnings, since an adjusted gross profit margin of 80% gives the company plenty of levers to pull to pare back costs.

Over time, DigitalOcean has the chance to grow even more quickly than its larger competitors because it's starting from a smaller base. That makes it an exciting opportunity for investors who might be looking for the next hot tech stock to hold for the years to come.

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