Why I Bought This Promising Cloud Computing Stock – The Motley Fool

The cloud infrastructure market is not winner-take-all. The biggest three providers -- Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud -- account for more than 60% of global spending. However, those platforms, each of which offer hundreds of distinct products, are complicated.

Getting up and running is complicated. Sorting through a laundry list of products to figure out the best options is complicated. Overcoming issues, errors, and roadblocks is complicated. Understanding the dreaded monthly bill is complicated.

These platforms are built for big companies. For individual developers and small businesses, dealing with all that complexity is a real cost that must be paid.

There are, thankfully, plenty of simpler options that have emerged over the years. Some cloud providers use AWS, Azure, or Google Cloud to power their services, taking away much of the complexity. Others, like DigitalOcean (DOCN 0.31%), own and operate their own cloud infrastructure.

After sticking DigitalOcean stock on my watchlist earlier this year, I finally pulled the trigger last week. Here's why.

At its core, DigitalOcean aims to make it quick and easy for just about anyone to spin up some cloud infrastructure and start developing. The company has made its pricing schemes transparent and easy to understand, and its set of products largely sticks to the basics.

Virtual machines, a platform-as-a-service offering, cloud functions, managed databases, a few types of storage, and some other odds and ends mostly cover what DigitalOcean has to offer. Through its recent acquisition of Cloudways, the company tacked on managed website hosting, which handles much of the administrative and maintenance burden in exchange for higher prices.

DigitalOcean puts a lot of effort into helping its customers develop and launch their products. A massive collection of articles, guides, tutorials, and other helpful content lights the way for anyone struggling to get things working. The company still has work to do on that front -- CEO Yancey Spruill noted in the third-quarter earnings call that plenty of customers still leave after the first couple of months.

The acquisition of Cloudways may help by offering customers an experience with fewer headaches and more handholding. Cloudways should also be stickier than DigitalOcean's unmanaged offerings since it handles so much that developers would need to take on if they decided to switch to an unmanaged alternative.

In addition to helping retain existing customers, DigitalOcean's trove of content acts as a low-cost customer-acquisition channel. The company has made some acquisitions purely to expand its content library, including CSS-Tricks in March and JournalDev in July.

During the first quarter, DigitalOcean's content drew in over 9 million unique monthly visitors. That number is likely higher today, now that those two acquisitions have bolstered the content library.

Through the first nine months of 2022, DigitalOcean spent less than 14% of revenue on sales and marketing. That low level of spending helped push revenue up 34% on a year-over-year basis. Keeping operations lean is important because the cloud infrastructure market is highly competitive. DigitalOcean doesn't have much in the way of pricing power, so gaining new business efficiently is critical.

DigitalOcean estimates that spending on cloud infrastructure-as-a-service and platform-as-a-service among companies with fewer than 500 employees will reach $144.6 billion by 2025. Some of that spending will certainly go to the big cloud platforms, but DigitalOcean has positioned itself as the go-to option for companies looking to keep things simple.

DigitalOcean expects its revenue to hit about $575 million this year, and it's aiming to grow revenue by at least 30% annually for the foreseeable future. Given the size of the market, that's certainly doable. A decade of 30% compounded annual growth would push annual revenue up to about $8 billion.

Shares of DigitalOcean are down about 80% from their all-time high, and the company is valued at roughly $2.4 billion today. The stock certainly isn't a screaming bargain, but if the company can continue to execute its growth strategy, I think it can beat the market in the long run.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has positions in DigitalOcean. The Motley Fool has positions in and recommends Alphabet, Amazon.com, DigitalOcean, and Microsoft. The Motley Fool has a disclosure policy.

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Why I Bought This Promising Cloud Computing Stock - The Motley Fool