Here's Why DigitalOcean Stock Soared This Week
Key Points
DigitalOcean beat expectations in the third quarter as artificial intelligence (AI) revenue boomed.
The company is winning with larger customers as its AI platform matures.
Revenue growth will accelerate next year.
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Cloud computing provider DigitalOcean (NYSE: DOCN) has been rallying this week following a third-quarter report that came in ahead of expectations. On top of beating analyst estimates across the board, DigitalOcean raised its outlook on the strength of its artificial intelligence (AI) business.
By 12:45 p.m. ET Thursday, DigitalOcean stock had gained 15.1% for the week, according to data provided by S&P Global Market Intelligence.
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AI revenue is soaring for DigitalOcean
DigitalOcean's total revenue grew by 16% year over year in the third quarter to $230 million. The company is doing particularly well with larger customers. The number of customers spending at least $100,000 annually grew by 26% in the third quarter, and revenue from those customers surged by 41%. Revenue from customers spending at least $1 million annually grew by 72%.
DigitalOcean's AI platform is a big reason why the company is thriving. AI revenue more than doubled year over year, the fifth consecutive quarter of at least 100% growth. DigitalOcean rolled out its Gradient AI platform in July, providing a one-stop AI shop for its customers. DigitalOcean's strong growth drove adjusted free cash flow to $85 million in the third quarter, up from just $26 million in the prior-year period.
The company also raised its revenue outlook for 2025 to a range of $896 million to $897 million. For 2026, DigitalOcean expects to grow revenue by 18% to 20%, pulling in its original plan to hit that growth target in 2027 by a full year.
Is DigitalOcean a buy?
DigitalOcean has accelerated its pace of product launches and innovation, and it's paying off. The company's AI platform is attracting bigger customers, driving up revenue and supporting free cash flow growth. By keeping its products and platform simple and easy to use, the company appeals to developers and businesses looking to avoid the major cloud platforms.
DigitalOcean stock isn't cheap, trading for around 22 times forward earnings. But that valuation seems reasonable, given the company's accelerating growth and AI success.
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Timothy Green has positions in DigitalOcean. The Motley Fool has positions in and recommends DigitalOcean. The Motley Fool has a disclosure policy.
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