DigitalOcean is one of the fastest-growing companies in the cloud space. However, its current problems are increasingly weakening its position. One of its competitors is ramping up the pressure on the company as well. Vultr is in the news after AMD decided to invest in it. Now that Vultr has been valued at $3.5b and plans to expand its AI and cloud computing potential, the situation for DOCN has become much harsher, making it tough for the company to hold its ground.
DigitalOcean is a well-known cloud computing company founded in 2012 and is headquartered in New York City. Built to meet the needs of developers, entrepreneurs, and small-medium enterprises (SMEs), the platform offers scalable virtual machines, called Droplets, managed databases, and Kubernetes solutions. DOCN is different from other companies since it emphasizes simplicity and affordability in terms of easy management of applications without spending too much on infrastructure. Revenue generated comes mainly from services based on subscription, primarily drawn from tech startups and large-scale enterprises in several industries to secure reliable cloud solutions.
This alliance by AMD with Vultr is entirely strategic, trying to acquire the growing complexity of cloud service providers at smaller scales. It allows Vultr to benefit from the efficient power consumption of AMD’s GPUs and Instinct accelerators, thus making it able to offer advanced and scalable cloud solutions. This, however, puts DOCN in an even tighter spot as the company competes with big names in the industry like Amazon AWS, Microsoft Azure, and Google Cloud. As Vultr becomes popular, the growth for DOCN revenue naturally starts to decline, suggesting the firm would soon be edged out in this very cutthroat marketplace.
DOCN’s problems go deeper as it spends less on R&D. In comparison to the investment hyperscalers are providing and strategic support of companies like AMD towards its competitors, DOCN is likely to be left behind. We’re bearish on DOCN. With rising pressure from notable firms and threats from well-funded companies like Vultr, the risk to the company is growing. In times when the growth is dwindling, the spending on R&D is declining, and competition is gaining speed, the prospects of DigitalOcean look dim.
DigitalOcean is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held DOCN at the end of the third quarter which was 19 in the previous quarter. While we acknowledge the potential of DOCN as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DOCN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
