How DigitalOcean plans to hit $1 billion in revenue by 2024
DigitalOcean (DOCN -5.90%) just offered investors an impressive Q3 2022 report that shows the cloud computing platform is more than holding its own in the face of an economic downturn. Third-quarter revenue grew 37% year-over-year, or 33% excluding the recent takeover of hosted cloud services company Cloudways. The company has been able to maintain a good balance of profitability along the way, generating a free cash flow profit margin of almost 15%.
However, with the US Federal Reserve’s interest rate escalation this year only beginning to take effect, DigitalOcean may face its toughest challenge yet. Annualized revenue was just $640 million last quarter, but CEO Yancey Spruill still has his sights set on hitting the $1 billion per year mark by 2024, which would represent an average compound growth rate. by about 25% in each of the next two years. How will DigitalOcean succeed?
Kudos to the work done so far by DigitalOcean
Let’s first give credit where credit is due before separating Spruill and the company’s plan for the future. In the third quarter of 2022, the CEO celebrated its third anniversary. As noted on the earnings call, when Spruill took the reins a few years ago (prior to the early 2021 IPO), DigitalOcean was growing its revenue at a low-to-mid rate of 20% and showing a negative available cash of 25%. flow margins. Like other CEOs have done when taking over tech start-ups, Spruill raised the bar by “focusing on the most impactful opportunities” DigitalOcean had in front of it.
DigitalOcean has fared better since then, as evidenced by its recent performance. And as we approach 2023, Spruill sees recent momentum continuing.
Revenues are expected to grow by at least 30% next year and free cash flow profit margins to reach 20% or more by 2024. A $70 billion and growing market for small and medium enterprises (SMEs) cloud services will certainly help, but DigitalOcean does not take this for granted. After all, it has fierce competition from some of the most successful organizations of all time in from Amazon AWS, Microsoftand alphabetical GoogleCloud.
Four Ways DigitalOcean Plans to Grow
Spruill said some of the strategies for the past three years will change slightly to take DigitalOcean to the next level. As indicated during the last earnings call, the four growth “levers” that the company will activate are:
1. Product enhancements that address large markets: DigitalOcean is a small cloud infrastructure platform, compared to its peers, but it already has a solid list of features that meet the complex needs of SMBs. Nevertheless, improvements can be made, either internally or through an acquisition (like what was done with Cloudways). Data storage is an example cited by Spruill. Data storage services are only a single-digit percentage of total sales, but housing data is big business for other cloud platforms. With some improvements, management expects to be able to double its data storage revenue as a percentage of total revenue mix in the coming years.
2. Change pricing for bundled products and services: This is a step that has already paid off for DigitalOcean. In July, the company introduced a new, cheaper starter tier at just $4 per month. Meanwhile, its previous starter tier was bumped up to $6 per month to reflect the more comprehensive set of features it offers today. These price changes are, in part, what helped DigitalOcean reaccelerate its growth rate in the third quarter. However, Spruill said there are other opportunities to refine pricing and put in place other service packages that help meet some of the specific needs of customers (such as offering online security as an add-on ). If the recent results can be repeated, it could be a huge boost for the company.
3. Develop the sales and marketing department: When Spruill took over in 2019, direct sales were virtually non-existent at DigitalOcean. The company has relied on its large database of free cloud development tutorials that drive traffic to its site and, in turn, drive sales. However, there was clearly an opportunity to introduce additional marketing efforts. So far so good, as DigitalOcean’s sales efforts have increased revenue by 5%, compared to 0% a few years ago. New programs like the recently introduced “Partner Pod” program that provides developers, consultants and other technology providers with training and co-marketing should help DigitalOcean continue to ramp up its efforts.
4. Extend the framework to new locales: DigitalOcean is a cloud infrastructure company, so expanding its reach to customers is also important. This means building new data centers – the basic computing unit of the cloud. A new data center in Australia will open in the final months of 2022, a key market for the tech industry. Additional locations are planned to further expand into new regions. This could not only open the door to cloud services for new customers, but it would also improve the performance of the company’s global network.
DigitalOcean shares are trading at a premium
I like DigitalOcean’s chances of reaching this billion dollar milestone. It has some momentum working in its favor right now, given the effects of global inflation. With rising core expenses, the cloud can help SMBs become operationally flexible and save on costs. And now a solidly profitable company itself, DigitalOcean has some leeway to spend money on new growth initiatives.
This stock is still priced at a premium that assumes a rapid pace of expansion and rising profit margins. DigitalOcean appears to be on track to deliver the goods after its latest earnings update.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Nicholas Rossolillo and his clients have positions in Alphabet (C shares), Amazon and DigitalOcean Holdings, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, DigitalOcean Holdings, Inc. , and Microsoft. The Motley Fool has a disclosure policy.