With less than two months until the end of 2024, it’s a great time for investors to think about which stocks they want to hold through 2025. For now, artificial intelligence (AI) appears to continue to be a dominant theme in the market. in 2025, you may want to start by looking at companies that compete in this area.

Digital Ocean (DOCN 2.31%) is a mid-sized company that provides cloud computing services exclusively to small and medium-sized businesses (SMEs), but it also has a growing portfolio of AI services that includes cutting-edge data center infrastructure equipped with technologies cutting edge. potato chips Nvidia.

DigitalOcean stock is currently trading near the cheapest level in its history as a public company, as measured by a common valuation metric, and it could be an ideal stock to buy now.

Image source: Getty Images.

Walk with giants

Amazon Web services, Microsoft Azure, and AlphabetGoogle Cloud are the three main providers of cloud services on a global scale. So how can a company like DigitalOcean, with a market cap of less than $4 billion, compete with these multi-billion dollar giants?

Simply put, it focuses on a segment of the market that megacaps don’t address: companies with fewer than 500 employees, particularly those in the start-up phase. Cloud industry leaders primarily look to larger companies because they tend to spend the most money. It is not as economical for them to target start-ups or SMEs.

DigitalOcean offers transparent and inexpensive pricing, highly personalized service and simplified deployment tools, which are suitable for SMEs because they have limited resources and generally cannot afford to have technical staff in-house. In fact, 474,000 of DigitalOcean’s 638,000 customers spend just $15 per month (on average) with the company. The hope is that some of them will eventually become “scalers,” a category of customers who spend an average of $2,153 per month with DigitalOcean.

Currently, the company has around 18,000 scalers on its customer list, and they account for more than half of its monthly revenue.

DigitalOcean has entered the AI ​​race

Last year, DigitalOcean acquired Paperspace, an operator of purpose-built data centers AI developers. It offers per-second billing and no lock-in contracts – ideal features for SMBs looking to deploy AI, especially because its prices can be up to 70% cheaper than equivalent services from Microsoft Azure.

Cloud industry leaders (including Azure) offer AI developers access to servers running thousands of graphics processing units (GPUs) of providers like Nvidia. However, SMEs generally do not need such computing power. Recognizing this, DigitalOcean recently announced that it would allow its customers access to fractional GPU capacity. This means they can pay to use between one and eight Nvidia H100 GPUs, a level of service that will allow even the smallest companies to deploy some AI-supported systems.

Fractional GPU capacity is not widely available in the industry, and cloud giants like Microsoft and Amazon are unlikely to attempt to compete on such a small scale. This gives DigitalOcean an incredible advantage in this particular market, and demand is already booming.

During the third quarter, DigitalOcean generated a record total revenue of $198.5 million, an increase of 12% from last year. However, its AI revenue specifically soared nearly 200%.

DigitalOcean stock looks cheap right now

DigitalOcean only started generating consistent quarterly GAAP profits last year. It may therefore be too early to evaluate its actions based on traditional values. price/earnings ratio (P/E). However, it generated $0.87 over the last 12 months. earnings per share (EPS)so based on its stock price of $38.50 at the time of this writing, its P/E ratio is 44.2.

It seems expensive compared to heavy technologies Nasdaq-100 index, which currently has a P/E ratio of 33.1. However, DigitalOcean grew its EPS by 1,650% year over year during the first nine months of 2024. If this trend continues, the stock will likely start looking cheap on a P/E basis sometime in 2025.

For now, the price/sales ratio (P/S) might be a better way to measure the value of this company. Based on DigitalOcean’s trailing 12-month revenue of $756.6 million and current revenue market capitalizationits stock trades at a P/S ratio of 4.8. That’s nearly its cheapest level since its IPO in 2021. It’s also a 43% discount from its lifetime average P/S ratio of 8.5.

DOCN-PS ratio data by Y charts.

According to researchers at market intelligence firm IDC, the SMB cloud market is currently worth $114 billion per year, so DigitalOcean has only scratched the surface of its opportunities. Additionally, IDC predicts that this market segment will reach $213 billion by 2027, but the tailwind from the AI ​​revolution could catapult that figure into trillions. Depending on the Wall Street predictions you base it on, AI could add between $7 trillion and $200 trillion to the global economy over the coming decade, and DigitalOcean has the potential to capture a significant share of the SME segment.

Therefore, investors looking for a new AI Opportunity to add to their portfolio and continue until 2025 should definitely consider DigitalOcean.