To The Moon

DigitalOcean’s share price continues to drift well below its former highs, even as the business shows signs of stabilisation and renewed momentum. With AI-fuelled growth headlines and free cash flow still positive, it’s tempting to believe the market has misjudged the company. But beneath the surface, the investment case requires more than optimism — it demands scrutiny. Mispriced, not broken — volatility is the price of opportunity Swimming with Sharks: DigitalOcean’s Niche Position Under Pressure DigitalOcean has long carved out its identity by catering to small businesses, individual developers, and lean startups — the self-serve end of the cloud market. Its key edge has been simplicity: transparent pricing, a clean UI, and fast deployment. That positioning historically insulated it from AWS and Azure’s enterprise-centric complexity. But the moat may be narrowing. $Amazon.com(AMZN)$ has aggressively pushed its Lightsail product, while Google Cloud continues to refine developer tooling with generous credits and AI integration. The critical question is whether $DigitalOcean Holdings, Inc.(DOCN)$ still offers a true cost or ease-of-use advantage. In a market increasingly dictated by AI and GPU-driven compute, developer loyalty is fragile. Management says the platform now serves over 400,000 customers spending under $50 per month. That’s impressive scale, but it also signals that DigitalOcean’s average customer isn’t enterprise-grade — and as hyperscalers close the simplicity gap, price competition could intensify. In short, DOCN may be more vulnerable to encroachment than the market once believed. AI Revenue Is Growing Fast — But Is It Big Enough to Matter? The company touts 160% year-over-year growth in AI-related annual recurring revenue. That’s eye-catching, but context is missing. If that growth is off a $5 million base, it’s hardly transformative. Even a $20 million AI run rate represents less than 3% of total trailing revenue. Investors need clearer disclosures to assess whether this segment can genuinely drive margin or multiple expansion. Still, AI demand is a promising signal. For developers building AI prototypes or inferencing applications at small to mid-scale, DigitalOcean’s predictable pricing and simplified provisioning can be preferable to the labyrinthine pricing tiers and service sprawl of the hyperscalers. For the first time in nearly two years, net dollar retention (NDR) returned to 100% in Q1 — an inflection after six quarters of decline. That’s not growth, but it is a ceasefire in what had become a painful churn trend. Sustained improvement — say, a return to 110% or more — would indicate customers are not just staying, but expanding their usage, which is crucial for SaaS-like operating leverage Yet the market remains unconvinced — the chart below reveals how sentiment has soured even as fundamentals begin to firm Price action tells a story of pessimism — but fundamentals suggest the plot is changing Crucially, even as AI investments ramp up, DigitalOcean is managing capital wisely. Capex is rising, but trailing 12-month free cash flow remains positive at $50 million. Gross margins exceed 60%, and EBITDA margins are around 30%. Few mid-cap software players can say the same while betting big on AI infrastructure. Balance Sheet or Balance Beam? How Much Risk Is Too Much At a glance, the balance sheet raises eyebrows. Debt stands at $1.74 billion — more than half the company’s market cap — and book value per share is negative. That would be a red flag in most contexts, and it's worth understanding why this hasn’t broken the thesis yet. First, liquidity isn’t under pressure. Cash on hand totals $360 million, and the current ratio is a healthy 2.4x. Second, earnings before interest and tax stand at $241 million, giving DigitalOcean ample coverage. However, interest costs are rising and refinancing risk looms in a higher-rate world. With a 13.5% profit margin, the company is profitable — but highly levered. This makes its AI investments and customer monetisation strategy even more important. The company must generate not just growth, but operating leverage. There is no bailout from a balance sheet flush with equity. Priced for Trouble, Performing Like a Turnaround $DigitalOcean Holdings, Inc.(DOCN)$ trades at just 3x trailing sales, despite revenue growth of 14%, EBITDA margins of nearly 30%, and consistent profitability. That’s a valuation more befitting a company in secular decline, not one guiding for record-high revenue of $890 million this year. $MongoDB Inc.(MDB)$, for instance, trades at 13x sales with negative margins. Even smaller infrastructure players like $Cloudflare, Inc.(NET)$ or Fastly enjoy 6-10x multiples, despite lower free cash flow. So why the disconnect? The market seems to be betting that DigitalOcean’s growth is temporary, AI traction is shallow, and that hyperscalers will ultimately reclaim the low-end developer market. That’s not irrational — it’s just perhaps overly conservative, especially given signs of operational stabilisation. Still, there are risks. If net retention slips again, or if AI spend doesn’t scale, the stock will likely remain stuck. But if retention trends hold, and AI revenue grows meaningfully from its current base, the re-rating potential is clear. Analysts have a $38 target — roughly 35% upside from current levels — but the real prize would be a durable rerating to 5-6x sales if confidence returns. For tactical investors, the $25–26 zone — its 52-week low — may offer an appealing entry point, especially if paired with a stop below $24 and a medium-term outlook into 2026. Final Take: A Watchlist Contender with Asymmetric Potential DigitalOcean is no longer bleeding, but it’s not sprinting either. The business is regaining its footing, growing modestly, and experimenting with AI infrastructure — all while managing to stay profitable and cash-flow positive. For a company priced like it’s terminally ill, that’s a compelling divergence. This isn’t a high-conviction core holding yet. The debt is high, scale is limited, and hyperscaler competition is real. But as a tactical bet on operational turnaround and possible AI upside, it deserves a spot on the watchlist — especially at today’s multiples. If fundamentals continue to firm up, the market may have no choice but to catch up. Asymmetry lives here — risk, reward, and misjudged momentum @TigerStars @Daily_Discussion @Tiger_comments @Tiger_SG @Tiger_Earnings @TigerClub@ @TigerWire