Cloud Growth and AI: DigitalOcean's Winning Formula Explained

DigitalOcean Holdings Inc. DOCN is a cloud infrastructure on-demand provider that enables enterprises and developers to construct, develop, deploy, and scale applications in an affordable and scalable manner. It’s instrumental for companies undergoing digital transformation and migrating to the cloud or getting started with cloud computing.

DigitalOcean operates in the computer and technology sector, competing with hyperscalers, including Microsoft Co. MSFT, Alphabet Inc. GOOGL and Amazon.com, Inc. AMZN.

What Is Infrastructure as a Service (IaaS)?

IT infrastructure can be built from the ground up by buying servers, networking equipment, storage equipment, including hard drives and solid-state drives (SSDs) and software, including operating systems middleware, not to mention hiring a talent to manage and operate it. When adding artificial intelligence (AI) capabilities like models, training and inferencing, the costs rise exponentially, especially with NVIDIA Co. NVDA GPUs and servers that can cost over $100,000 each.

On the other hand, it can be rented with infrastructure-as-a-service (IaaS) at a fraction of the cost from providers like Digital Ocean. IaaS is way more cost effective, flexible and scalable in case you need to add more capacity and more servers.

DigitalOcean’s Droplets Make It Simple

Droplets are DigitalOcean's virtual machines that you can rent as they act as lightweight, customizable servers through the cloud. Droplets are fundamental units of computing power you can manage and deploy on DigitalOcean. They are customizable, giving you full control over the operating system, networking settings, and software. They are scalable, so you can increase or decrease resources like CPU, storage, and memory as your needs change. Droplets can be used to run applications like website hosting, blogs, data storage, game servers, databases, developing and testing applications, and backend services. Droplets can be deployed in minutes in any size and any location in the world.

Digital Ocean’s GPU Droplets Are Scalable Virtual Machines for AI/ML Workloads

GPU Droplets can be used for AI and machine learning (ML) workloads. These are scalable, simple, and affordable virtual machines serving high-performance computing (HPC) to run training and inference on AI models, process massive data sets, and sophisticated neural networks for deep learning use cases.

Digital Ocean Issues Upside Revenue Guidance

For the second quarter of 2024, DigitalOcean reported earnings-per-shares (EPS) of 48 cents, beating consensus analyst estimates by 9 cents. Revenues grew 13.1% YoY to $192 million, beating $188.63 million consensus estimates. Its annual run rate (ARR) rose 15% YoY to $781 million.

DigitalOcean issued Q3 2024 EPS of 39 cents to 41 cents versus 41 cents consensus estimates. Revenues for the third quarter are expected to be between $196 million and $197 million, beating $195.21 million consensus estimates.

For the full year of 2024, DigitalOcean sees EPS of $1.60 to $1.70 versus $1.64 consensus estimates. Revenues are expected between $770 million to $775 million, beating $769.92 million consensus estimates.

DigitalOcean CEO Paddy Srinivasan commented, “With our new leadership team in place and accelerating product innovation, we continue to execute on our mission of providing cloud computing to growing technology companies as well as pursue our AI strategy of democratizing access to GPU Infrastructure and a compelling platform to simplify building and consuming AI.”

DOCN Stock Attempts a Second Bull Flag Pattern

A bull flag occurs when the stock surges through the upper descending trendline resistance. A steep run-up forming the flagpole precedes the flag comprised of descending upper and lower trendlines.

DOCN triggered its first bull flag breakout on Sept. 9, 2024, surging from $36.78 to a swing high of $43.97, completing the flagpole. Parallel descending upper and lower trendlines formed comprised of lower highs and lower lows. A breakout through $41.58 would trigger the bull flag. The anchored VWAP support is at $36.86. The daily relative strength index (RSI) is slipping to the 58-band. Fibonacci (Fib) pullback support levels are at $39.65, $36.23, $33.54, and $29.76.

DigitalOcean’s average consensus price target is $37.67, and its highest analyst price target is $47.00. The stock has five buy ratings and five hold ratings from analysts.

Actionable Options Strategies: DOCN is trading above its consensus target, so it would be prudent to wait out a pullback using cash-secured puts at the fib pullback support levels to buy the dip. If DOCN triggers its second bull flag breakout, then bullish options investors can take a bullish call debit spread for less capital than owning the stock while minimizing downside with capped upside gains.

The article "Cloud Growth and AI: DigitalOcean's Winning Formula Explained" first appeared on MarketBeat.