This Artificial Intelligence (AI) Company's Shares Appear to Be a Notable Purchase Opportunity After Its Recent Dip

This Artificial Intelligence (AI) Company's Shares Appear to Be a Notable Purchase Opportunity After Its Recent Dip

DigitalOcean, represented by the ticker symbol DOCN (-7.87%), has had a challenging year on the stock market, with a 10% decrease following its third-quarter results release on November 4. Despite this, the company's shares have only managed to climb by 7% throughout 2024.

However, the market might be undervaluing DigitalOcean's significant growth potential and recent strong results. A thorough analysis of the firm's performance reveals that the recent decline in stock price was unwarranted.

Let's delve into the reasons behind DigitalOcean's continued growth and its focus on artificial intelligence (AI) solutions, which could boost its customer base.

DigitalOcean displays steady growth, bolstered by the prospect of AI integration

DigitalOcean reported a remarkable 12% year-over-year revenue increase to $198 million in the third quarter of 2024. Additionally, the company's adjusted earnings surged by 18% compared to the same quarter in 2023, reaching $0.52 per share. The revenue figure surpassed the company's guidance range of $196 million to $197 million, while the earnings figure not only beat the expected $0.40 per share but also significantly exceeded it.

In an optimistic move, DigitalOcean also raised its full-year revenue forecast. The company now anticipates closing the year with $776 million in revenue, up from the initial expectation of $772.5 million. In terms of non-GAAP earnings, the new forecast is set between $1.70 per share and $1.75 per share, compared to the earlier range of $1.60 per share to $1.70 per share.

Oddly enough, DigitalOcean's strong third-quarter performance did not prevent a decline in its stock price. Given the company's emphasis on offering cloud-based AI solutions, which could help it expand its customer base, the sell-off is puzzling. DigitalOcean caters to various clientele, including start-ups, developers, and small to medium-sized businesses. It provides both infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) solutions.

Customers utilize DigitalOcean's platform to construct, expand, and deploy applications while also buying networking, computational, and storage services from the company. DigitalOcean also introduced a service called GPU Droplets, providing customers with virtual machines powered by Nvidia's popular H100 GPUs on an on-demand basis.

This new offering allows customers to access DigitalOcean's GPU infrastructure for AI model training, data analytics, deep learning, and high-performance computing, at $2.99 per GPU per hour. Customers have the flexibility to scale up their requirements as needed.

GPU Droplets enable users to create chatbots, train large language models (LLMs), generate images and videos, among other tasks. DigitalOcean recently launched GenAI Platform, a generative AI product, giving customers access to popular models such as Llama 3.1 and Mistral NeMo, which they can use to build customized AI agents using their proprietary data.

DigitalOcean's strategic moves to tap the fast-growing AI market are commendable. These decisions enable customers to train and deploy AI models at a manageable cost and also assist them in creating and customizing applications with the help of foundational models.

The positive effect of this strategy on customer spending is evident, with DigitalOcean's average revenue per user (ARPU) increasing by 11% year over year in the third quarter of 2024, reaching $102.51. It is worth noting that DigitalOcean's ARPU has consistently risen throughout the year, from $95.13 in Q1 to $99.45 in Q2 and surpassing the $100 mark in Q3.

Given the company's anticipation of a healthy increase in its market opportunity, it is plausible that the upward trend in ARPU will continue. DigitalOcean projects cloud spending by individuals and small companies to reach $114 billion in 2024, with an annual growth rate of 23% rising to $213 billion by 2027.

The integration of AI tools within its cloud platform could hasten its growth and enhance its future growth outlook, making it an attractive buy option right now, considering its current valuation and the potential impact of AI.

Consider purchasing this stock presently

DigitalOcean is currently trading at 21 times forward earnings, which represents a significant discount to the tech-heavy Nasdaq-100 index's forward earnings multiple of nearly 30. Investing in this AI stock at this discounted rate could prove to be a lucrative decision, given the company's expected earnings growth rate improvement in the future.

DigitalOcean's 2024 earnings estimate suggests a possible 8.5% increase from the 2023 value of $1.59 per share. However, forecasts for the subsequent years indicate that the company's bottom line growth should accelerate to double-digit figures in 2026.

Moreover, consensus forecasts project DigitalOcean's earnings to grow at an annual rate of approximately 14% over the next five years. It is not implausible for the company to surpass this estimate, thanks to a new catalyst in the form of AI.

Thus, tech-savvy investors hunting for an undervalued stock that could benefit from an AI boost in the long term should scrutinize DigitalOcean more closely following the recent market underestimation and subsequent stock price correction.

Despite DigitalOcean's impressive third-quarter financial performance and focus on AI integration, its stock price has experienced a decline. This discrepancy might present an opportunity for savvy investors, as the company's current valuation in terms of forward earnings is significantly lower than the tech-heavy Nasdaq-100 index.

Investors who believe in DigitalOcean's potential growth in the AI market might find this discounted rate attractive, considering the company's expected earnings growth rate improvement in the future. With a projected annual earnings growth rate of approximately 14% over the next five years, DigitalOcean could be an undervalued stock worth considering for long-term gains.

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