DigitalOcean Has a Smart Strategy for a Tough Economy

Cloud computing platform DigitalOcean (NYSE: DOCN) has carved out a niche for itself in the industry by focusing on simplicity. While Amazon Web Services and other hyperscale cloud platforms offer expansive product lists and complicated pricing schemes, DigitalOcean focuses more on core offerings and keeps pricing transparent.

Developers and businesses without vast IT budgets have been drawn to DigitalOcean. The company now has more than 170,000 customers spending at least $50 per month.

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A new CEO took over in early 2024, and the company has tweaked its strategy in an effort to accelerate growth. While simplicity remains at the core of DigitalOcean's platform, the company is now emphasizing the significant cost savings customers can achieve by switching from a hyperscaler. DigitalOcean claims that customers can see total cost of ownership savings of more than 30% by moving to its platform.

Given the uncertain state of the economy, this push to focus on cost savings is a smart move that could help the company accelerate its growth over the next few years.

Image source: Getty Images.

Going after big spending digital natives

DigitalOcean's growth has been slowing down, but there were some positive signs in the first quarter. Total revenue was up 14% year over year, an improvement over the 12% growth the company reported in the first quarter of 2024.

DigitalOcean's net dollar retention rate reached 100% after multiple quarters stuck in contraction territory. While this means that there's still no net expansion in spending from existing customers after taking into account contractions, this metric is now trending in the right direction.

The company's success winning larger customers is part of the equation. Revenue from the Scalers+ customer group, which is comprised of customers spending at least $100,000 annually, jumped by 41% year over year in the first quarter. This group now accounts for 23% of total revenue, up from 19% a year ago.

To win more big-spending customers, DigitalOcean is refining its target customer to focus on digital native companies, rather than non-tech companies. This group represents a $140 billion market, with some additional upside from artificial intelligence (AI) spending. Digital native companies are less likely to be bogged down with legacy IT infrastructure, which can ease the transition to a public cloud platform like DigitalOcean.

DigitalOcean has accelerated its product development pipeline, releasing five times as many product features in the first quarter of this year, compared to the first quarter of last year. While the company's platform has become somewhat more complicated, it now covers a wider range of use cases and is a more viable alternative to the big cloud platforms for companies with complex needs.

The promise of significant cost savings could be a big selling point, especially with companies facing unprecedented uncertainty due to the Trump administration's trade policies. As companies look for ways to reduce costs, moving to a less expensive cloud provider like DigitalOcean could become a popular choice.

Accelerating growth

DigitalOcean kept its outlook for 2025 unchanged, calling for revenue growth between 11.5% and 14% and for a free-cash-flow margin between 16% and 18%. DigitalOcean may be more exposed to an economic slowdown in some ways, compared to the hyperscalers, since its customer base is comprised of smaller businesses that are more exposed than large enterprises. The economy is a wildcard for the rest of the year, and DigitalOcean could easily fall short of its guidance if conditions deteriorate.

In the longer term, DigitalOcean is targeting 18% to 20% revenue growth in 2027 and a return to 20%+ revenue growth thereafter. Positioning itself as a cost-effective alternative to AWS, not just a simpler version of cloud computing, could help drive customer growth. And the company's quicker pace of product development can help it fill in the gaps and make its platform more appealing to larger customers.

DigitalOcean stock tumbled on Tuesday as investors were evidently disappointed with the company's results and guidance. However, with a strong value proposition and a more complete cloud platform, DigitalOcean is well-positioned to win over digital native customers tired of the high costs associated with the big cloud platforms.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has positions in DigitalOcean. The Motley Fool has positions in and recommends Amazon and DigitalOcean. The Motley Fool has a disclosure policy.