DigitalOcean's 30%-Plus Revenue Growth & 20% FCF Margin Attainable In CY24, Analyst Says

  • Needham analyst Mike Cikos initiates coverage on DigitalOcean Holdings Inc DOCN with a Buy rating and a price target of $36.
  • Cikos believes DigitalOcean is addressing a significant, historically under-served market opportunity by enabling Developers, SMBs, and Start-ups as a Cloud provider for IaaS and PaaS, allowing customers to focus on building their businesses. 
  • The analyst sees management's targeted 30%-plus Revenue growth and a 20% Free Cash Flow Margin in CY24 as attainable given the company's sales & marketing initiatives and product roadmap initiatives for Managed Services and packaging and pricing. 
  • DigitalOcean's recent acquisition of Cloudways demonstrates the market-expansion opportunity to offer Managed Services, which generate a 2x increase in customer spending (compared to DigitalOcean's bread-and-butter DIY solutions) at a Free Cash Flow Margin similar to the corporate average. 
  • Cikos expects DigitalOcean's product offering mix to settle at a 60/40 split between IaaS to PaaS over time (from roughly 80/20 today) based on higher growth from PaaS and Managed Services.
  • The analyst estimates that 20% of DigitalOcean's Customer Base falls within the customer cohort that spends more than $50 per month. This cohort represents 86% of total revenue. 
  • Over time, the analyst expects a greater revenue concentration with larger customers based on Managed Services, an outbound sales motion, and management packaging of solutions over an à la carte menu to provide a more seamless customer experience and reduced time-to-value. 
  • Also, the analyst sees the broad applicability of management's anticipated Security packaging as a top-of-mind initiative across its customer base, which indicates DigitalOcean's ability to identify packages beyond vertical-specific use cases.
  • Also ReadDigitalOcean Expands Overseas Reach With New Data Center In Sydney
  • Price Action: DOCN shares traded higher by 6.57% at $29.61 on the last check Thursday.
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