This Unstoppable Growth Stock Soared 500% in the Last 12 Months, but Wall Street Expects Limited Upside From Here

The cloud computing industry is dominated by Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. These three platforms, which between them control more than 60% of the cloud infrastructure market, offer hundreds of services to help businesses thrive in the digital age, but they also provide customers with the tools to develop and deploy artificial intelligence (AI) software, from computing capacity to ready-made AI models.

DigitalOcean (NYSE: DOCN) is another cloud provider that specifically targets small- and medium-sized businesses (SMBs), which has become an extremely valuable segment of the market. It offers a growing portfolio of affordable solutions to help such customers unlock the power of AI, and demand is currently through the roof.

DigitalOcean stock has exploded higher by 500% over the last 12 months, but the average price target among the analysts tracked by The Wall Street Journal suggests further upside might be limited.

Image source: Getty Images.

DigitalOcean just launched a new AI cloud platform

DigitalOcean attracts clients to its cloud products by offering affordable, transparent pricing; highly personalized service; and a simple interface. These attributes are perfect for SMBs that typically have limited financial resources and limited in-house technical expertise. The company has been applying the same blueprint to its growing portfolio of AI products and services, with great success.

In the first quarter, it launched an all-in-one platform, DigitalOcean AI-Native Cloud, with five distinct layers. The foundational layer is infrastructure, which includes 20 data centers equipped with the latest AI chips from suppliers such as Nvidia and Advanced Micro Devices.

Customers can rent computing capacity from those data centers through AI-Native Cloud, and the remaining four layers help them convert it into AI software. For example, the platform hosts a variety of ready-made AI models from leading developers such as OpenAI and Anthropic that help businesses rapidly build AI chatbots, agents, and other tools.

The market's demand for data center capacity currently exceeds supply by a wide margin, which is why DigitalOcean recently raised $888 million from investors to build more infrastructure.

DigitalOcean's revenue growth continues to accelerate

DigitalOcean had a record $1.03 billion in annual run rate revenue (ARR) in the first quarter, up 22% from the year-ago period. It was the third straight quarter during which its growth rate accelerated, underscoring the narrative of strong demand for AI infrastructure and services.

In fact, AI customers accounted for $170 million of DigitalOcean's ARR at the end of the first quarter, up by 221% year over year. In other words, AI products and services are now the company's primary growth drivers.

DigitalOcean believes its overall revenue growth rate could accelerate further to 50% next year as it adds more data center capacity. This momentum is a key driver of the company's recent stock price gains.

Wall Street sees limited upside, and valuation might be why

The Wall Street Journal tracks 18 analysts who cover DigitalOcean stock, and 10 of them have given it a buy rating. Three others are in the overweight (bullish) camp, while the remaining five recommend holding. None of them recommends selling.

Those analysts have an average price target of $180.64 on the stock, and since DigitalOcean stock opened Tuesday trading at $180.70, that implies that it's essentially headed sideways over the next 12 months. That doesn't offer a particularly appealing buy argument.

Yet considering how fast the business is growing, why isn't Wall Street more bullish? The answer lies in the company's valuation. DigitalOcean stock is trading at a price-to-sales (P/S) ratio of 20.3, which is more than double its long-term average of 8.3. Even if the company grows its revenue by over 50% in 2027 as expected, that would still leave its stock trading at a forward P/S ratio of 10.3.

DOCN PS Ratio data by YCharts.

Simply put, DigitalOcean's current valuation already reflects much of its expected business growth for the next year or more, leaving it little room for further share price gains for a while. That might change as we move through 2027, because if the company forecasts revenue growth of above 50% for 2028, its stock might start to look cheap again on a forward basis.

All that said, those investors who missed the blistering 500% gain in DigitalOcean stock over the last 12 months might want to keep waiting on the sidelines until there is an opportunity to buy it at a more reasonable valuation.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, DigitalOcean, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.