If you like Microsoft, Amazon, and Alphabet, you might like this growth stock

Microsoft, Amazonand Alphabet they are very different companies, but they are the top three players in the rapidly growing cloud computing industry.

They offer hundreds of cloud services to businesses, from simple data storage to complex software development tools. More recently, they have invested heavily in new data centers packed with powerful graphics processing units (GPUs) from the genre Nvidiaand rents computing power to artificial intelligence (AI) developers. This could be one of the most valuable opportunities in the history of the cloud industry.

Microsoft, Amazon and Alphabet are locked in a fierce battle for AI market share. DigitalOcean (DOC 4.14%)on the other hand, it has carved out a profitable niche by serving only small and medium-sized enterprises (SMEs), which are often overlooked by its trillion-dollar competitors. DigitalOcean stock looks like an excellent value, and here’s why investors may want to buy it right now.

Image source: Getty Images.

Democratizing access to AI infrastructure

Cloud leaders typically focus on serving large organizations because they have the largest budgets, while SMBs receive less attention. DigitalOcean exclusively targets these customers, whether they are startups or have up to 500 employees.

DigitalOcean offers them highly customized services, clear and transparent pricing, and cloud tools that are simple to implement because the company knows that most of its customers cannot afford in-house technical teams.

DigitalOcean is now using that model to provide customers with affordable AI solutions. Right now, cloud leaders allow their biggest customers to access tens of thousands of GPUs of computing power, which means developers with significant financial resources are building the most advanced AI models. Smaller companies simply cannot compete.

DigitalOcean recently announced that it will enable its customers to access a small number of AI GPUs (typically between one and eight), including Nvidia’s flagship H100, to integrate AI into their workflows at scale that agree CEO Paddy Srinivasan says this on-demand fractional access to GPUs is a first of its kind for the industry and helps democratize access to AI.

The company will also open a new state-of-the-art data center in Atlanta in early 2025 that will expand its AI computing capacity. It adds to the capability DigitalOcean acquired when it bought Paperspace last year, which is a specialist in providing affordable AI data center infrastructure.

In fact, Paperspace is up to 70% cheaper than cloud leaders like Microsoft Azure when it comes to AI compute capacity, as it offers per-second billing to reduce waste and doesn’t lock customers into contracts. In addition, it has a leaner cost structure because it offers a narrow set of services and passes those savings on to the customer.

DigitalOcean’s revenue growth is reaccelerating

DigitalOcean generated record revenue of $192.5 million in the second quarter of 2024 (ended June 30), which represented a 13% year-over-year increase. It marked the second consecutive quarterly acceleration in growth.

The company was regularly growing its top line by more than 30% each quarter just two years ago, so it’s slowed considerably across the board. One reason is that DigitalOcean is currently cutting costs to increase its profitability. During the second quarter, the company had total operating expenses of $95 million, which was an 8.5% reduction from the year-ago period.

This resulted in net income of $19.1 million, a staggering 2,777% growth.

The fact that DigitalOcean has been able to accelerate its revenue growth while reducing costs and generating a healthy profit really speaks to the organic demand for its cloud services.

Additionally, here’s something investors should keep an eye on in the coming quarters. DigitalOcean said its AI-attributable revenue, in particular, grew 200% year-over-year in Q2. The company didn’t disclose how much revenue it actually generated from its AI services (including Paperspace), so we can assume the increase was from a very low baseline — but it still signals growing demand.

Why DigitalOcean Stock is a Buy Now

According to an estimate by Grand View Research, the cloud industry as a whole will be worth about $730 billion this year. The SMB segment alone could be worth $114 billion, according to DigitalOcean, but the company expects it to grow 23% annually going forward, compared to just 21.2% for the cloud industry as a whole.

DigitalOcean’s strategy to provide affordable AI infrastructure and services could add a new dimension to this opportunity as it taps into a brand new market that has been served by other vendors. Global consulting firm PwC believes AI will add $15.7 trillion to the global economy by 2030, so it’s easily the biggest financial opportunity DigitalOcean has faced to date.

DigitalOcean shares are currently trading 75% below their all-time high set during the tech frenzy of 2021. Back then, it was overvalued with a price-to-sales (P/S) ratio of about 30, but the company has grown. its earnings steadily since then, and the P/S ratio is now just 4.1.

That’s a discount of more than 50% from the average P/S ratio of 8.8 since the company went public in 2021:

DOCN PS report data by YCharts

Simply put, DigitalOcean stock looks like a good value right now. Combine that with the company’s accelerating revenue growth, rising profitability and enormous opportunities in the cloud and AI industries, and investors might do well to start buying.