When You Look Back in Five Years, You'll Wish You Had Bought This Tiny Artificial Intelligence (AI) Stock - Latest Global News

When You Look Back in Five Years, You’ll Wish You Had Bought This Tiny Artificial Intelligence (AI) Stock

Many years ago, companies collected customer and operational data and stored it on on-site physical servers. Today, they instead rent hardware capacity from massive, centralized data centers at a fraction of the cost, a practice known as cloud computing.

Data center operators like Amazon internet services, Microsoft Azure and alphabetGoogle Cloud dominates the cloud industry. Their services go far beyond simple data storage to include hundreds of different solutions designed to help companies thrive in the digital age, and more and more of them are focused on artificial intelligence (AI).

DigitalOcean (NYSE:DOCN) is another cloud computing company, but one that focuses specifically on serving small and medium-sized businesses (SMEs). The company is now expanding into AI to give its customers access to the technology at an affordable price. It could be an incredible growth opportunity. That’s why investors might be glad they bought DigitalOcean shares when they look back on this moment in five years.

A person looks at the server hardware while holding a laptop.

Image source: Getty Images.

DigitalOcean dives into AI

Amazon, Microsoft, and Alphabet are trillion-dollar companies, so their cloud divisions are incredibly well-resourced. However, this also means that targeting small businesses doesn’t really have a positive impact on sales. Therefore, they prefer to focus on larger companies that can afford to spend millions of dollars on cloud services. DigitalOcean, on the other hand, is valued at just $3.5 billion and therefore benefits from startups and companies with fewer than 500 employees.

DigitalOcean offers these customers personalized support, affordable and transparent pricing, and simple functionality, knowing that most of them do not have in-house technical teams. Additionally, the company offers a relatively narrow portfolio of services tailored to its target market, which streamlines its cost structure and keeps prices affordable.

Last year, DigitalOcean bought Paperspace, a startup that manages data centers for AI developers, for $111 million. It offers some of the industry’s leading semiconductor hardware, including the H100 GPU developed by NvidiaNevertheless, the prices are up to 70% cheaper than cloud giants like Microsoft Azure.

Like DigitalOcean, Paperspace has a lean cost structure because its product offering is extremely limited and these savings are passed on to the small developers it serves. By combining the two companies, customers will receive a holistic solution that covers all of their cloud and AI needs that they likely couldn’t afford from the leading cloud providers.

DigitalOcean Chief Executive Officer Paddy Srinivasan says demand for its AI GPU computing capacity will outstrip supply for the foreseeable future. In fact, although still in its infancy, the company’s annual recurring revenue from AI services grew at an annual rate of 128% in the three months between December 2023 and March 2024.

DigitalOcean’s revenue growth has slowed recently, but for good reason

DigitalOcean generated revenue of $184.7 million in the first quarter of 2024. That was a record high, but only represented growth of 12% compared to the same period last year. In 2022, the company’s revenue routinely grew by more than 30%, but in 2023 growth began to slow as management shifted its focus.

Like most technology companies, DigitalOcean used to pursue a “growth at all costs” strategy, which meant investing heavily in sales, marketing, and research and development, even if it resulted in net losses. However, since interest rates began rising in 2022, companies like DigitalOcean have shifted their focus to capital protection, meaning they are instead cutting costs to generate profits.

In the first quarter, DigitalOcean reduced its operating costs by 20% compared to the same period last year, resulting in net income of $14.1 million. That was a positive development over net income of $16.3 million Loss delivery took place in the same quarter of 2023.

Simply put, a slowdown in revenue growth is certainly not a good thing on its own. However, in an uncertain economic environment where debt is expensive and raising fresh equity can be challenging, the best solution for a company is to protect its liquidity. Most analysts expect the Federal Reserve to begin cutting interest rates in 2024, which should boost economic activity. Ultimately, if favorable conditions prevail, DigitalOcean can easily return its focus to growth.

Why DigitalOcean stock is a buy now

DigitalOcean estimates the addressable market for SMB cloud services at $114 billion annually, a figure that could nearly double to $213 billion by 2027. The company’s forecasts suggest it will generate up to $775 million in revenue this year, so it has barely scratched the surface of this opportunity.

But AI could significantly increase the value of DigitalOcean’s addressable market. PwC estimates the technology will contribute $15.7 trillion to the global economy by 2030, and Cathie Wood’s Ark Investment Management believes AI software companies could generate $14 trillion in revenue by then. There’s no telling whether these predictions will come true in the long term, but applications like ChatGPT are already driving a productivity boom thanks to their ability to instantly generate text, images, videos and computer code.

DigitalOcean (with the help of Paperspace) is an attempt to capitalize on this opportunity. Its data center infrastructure and cloud platform are the tools SMEs need to join the AI ​​revolution, and as the company’s CEO said, demand is already outstripping supply.

DigitalOcean stock is trading about 70% below its all-time high reached during the tech boom in 2021. Their valuation was a bit unrealistic at the time, but investors have also punished the company for its recent slowing sales growth. However, for investors with an investment horizon of at least five years, this could represent a golden buying opportunity, as AI could become a key driver of DigitalOcean’s business by then.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, DigitalOcean, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.

When you look back five years from now, you’ll wish you had bought this tiny artificial intelligence (AI) stock originally published by The Motley Fool

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