This CEO’s quote sums up why I’m buying this high-growth stock
While most earnings calls offer a collection of valuable updates on a company’s progress, management occasionally makes remarks that seem to jump straight from the transcript.
This was precisely the case for me when I was browsing DigitalOceanit’s (DOCN -3.42% ) call for fourth quarter 2021 results when CEO Yancey Spruill said:
At the same time, those customers spending less than $50 per month give us an incredible option on their future success. Like so many of these customers will launch an idea that they will test on DigitalOcean and ultimately turn it into a thriving and rapidly growing business.
More specifically, the word option in this quote immediately caught my attention. What a great way to explain DigitalOcean’s growth potential: as an option.
Or, to put it another way, the company’s focus on small and medium-sized enterprises (SMEs) almost makes it feel like an angel investor or venture capitalist. By offering its simplified cloud solutions to start-ups that are often little more than a business idea, DigitalOcean is there at the start of most of its clients’ journeys.
So why does this make me buy DigitalOcean shares ASAP? We’ll take a look.
DigitalOcean is part of it
In Q4 2021, DigitalOcean had 609,000 customers, but only 99,000 (or 16%) spent more than $50 per month with the company. While saying it’s a good thing for investors might seem counter-intuitive, it is indeed a feature, not a bug. Consider that 16% of customers represents 83% of the company’s sales, and it’s fair to say that DigitalOcean acts in a similar capacity to a venture capitalist – just instead of capital, it provides simplified cloud computing.
Offering infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) solutions, the company enables the 100 million SMBs around the world to “spend more time building software that changes the world”. With this plan to launch on the ground floor with thousands of young start-ups, DigitalOcean has positioned itself to succeed as its customers thrive.
Perhaps because of this option-like potential, the market took notice of DigitalOcean shares, sending them up 200% after its IPO in early 2021.
While the company’s stock has given off most of its gains in recent months, the market opportunity in IaaS and PaaS for companies with fewer than 500 employees is $47 billion and $25 billion, respectively. Even better for investors, these markets are expected to grow at around 27% annually through 2025. In Q4 2021, the company reported revenue growth of 37% year-over-year. With DigitalOcean generating $429 million in revenue in 2021 as a whole, the opportunity to expand its market share is immense.
Multi-bagger stock potential with multi-bagger customers
By focusing on these SMBs around the world, DigitalOcean is building strong relationships with its customers, providing support and a sense of community for small upstarts that its massive cloud peers often overlook – or even not notice. Because of this unique niche in its market, DigitalOcean shares are quietly masquerading as an investment portfolio.
Like many investment portfolios, most of the firm’s clients (stock picks) produce average returns, gradually increasing over time, while a handful of its clients underperform and become less relevant. However, like some of the best investment portfolios, DigitalOcean’s top clients show outsized returns, becoming well-known companies themselves, offering this option-like capability described by Spruill.
Certainly, a comparison of apples to oranges, multi-baggers and options (in different ways) offer undeniably large yield potential.
As DigitalOcean continues to grow its customer base, adding new potential customers as it goes, it will simultaneously grow alongside its existing, more successful customers. This idea is a lot like buying and holding stocks for the long term and adding winners over time.
Because of these “winning” customers, it will be crucial for investors to monitor DigitalOcean’s Net Dollar Retention (NDR) going forward. By calculating the increase in sales among a company’s existing customer base, including churn, an NDR greater than 100% shows growth within a company’s operations.
This detail makes DigitalOcean’s 116% mark in the fourth quarter of 2021 and its 101% growth in the first quarter of 2020 very impressive – and more importantly, it shows that its high flyers have continued to win. If DigitalOcean’s NDR remains this strong or continues to grow, expect its high revenue growth rates to become the norm, likely propelling the company into becoming a multi-bagger of multi-baggers.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.