3 Reasons to Buy DigitalOcean Stock Like There's No Tomorrow

DigitalOcean (NYSE: DOCN) is a cloud stock that has long frustrated investors. The company developed an ingenious way to target small and medium-sized businesses that did not allow Amazon and Microsoft to compete directly.

Unfortunately for its investors, the stock never recovered from the 2022 bear market. Still, it has built some catalysts that may make DigitalOcean a stock again worth considering. Consequently, three notable factors now work in the cloud stock's favor, and with these attributes, DigitalOcean stock could rise beyond its 2021 highs as conditions improve.

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1. Competitive advantage

At first glance, it may seem surprising that DigitalOcean, with a market cap of around $4 billion, could compete with enterprises having market caps that exceed $2 trillion. Nonetheless, the size of AWS or Azure does not allow for taking DigitalOcean's approach without destroying their business models.

DigitalOcean allows customers to buy IT services a la carte, meaning a small business can buy only the IT services it needs, likely leading to lower costs. In contrast, the tech giants have geared themselves to serve larger clients with more complex needs, meaning it would likely diminish their revenue if they attempted to compete directly.

Moreover, DigitalOcean has built a community. It offers customers a documentation library and the ability to ask other DigitalOcean customers for help when they encounter an issue. This makes it possible for small enterprises to solve IT problems without turning to more expensive services.

2. Artificial intelligence

Furthermore, this is an approach could help bring artificial intelligence (AI) to DigitalOcean's client base. Since OpenAI made a major breakthrough with ChatGPT in 2023, large organizations have scrambled to reap the potential benefits of AI.

However, thanks to the recent breakthrough from DeepSeek, organizations can now run AI models relatively cheaply. Thus, DigitalOcean shareholders should expect the demand for such services to rise considerably.

This should happen because the company introduced its generative AI platform in January, making the technology more widely available. It incorporated DeepSeek into this platform soon after, meaning DigitalOcean's customers can potentially incorporate this technology into their businesses at a transparent and lower cost.

3. DigitalOcean's financial value proposition

Fortunately, this affordability extends beyond DigitalOcean's customer base as its stock has become a bargain.

DigitalOcean stock was a victim of the 2022 bear market, losing more than 85% of its value at one point. While it has begun to recover, the stock sells for about two-thirds below that all-time high.

Admittedly, the $781 million in revenue in 2024 rose by only 13% yearly. Also, the 2025 financial outlook forecasts approximately the same growth rate, which may not bode well for making huge gains.

Nonetheless, the 2024 net income of $84 million is up considerably from the $19 million the company earned in 2023.

Moreover, DigitalOcean sells at a low valuation. At its height in late 2021, its price-to-sales (P/S) ratio briefly surpassed 30. Today, it sells for 5 times sales, and unlike in 2021, DigitalOcean is now a profitable company, giving it a P/E ratio.

On a trailing basis, it recently traded at 51 times earnings, a low cost for a newly profitable company. Also, when looking ahead to the forward P/E ratio, the earnings multiple falls to around 23. Such a valuation means that if an AI-induced improvement stokes financial growth, DigitalOcean stock could expand its earnings multiple and potentially earn massive returns.

DigitalOcean is a buy

Ultimately, as business conditions improve, DigitalOcean stock could return to prosperity. But it may take some tangible signs of increased growth before investors buy into this stock in earnest.

However, larger incumbents will likely not upend their business models to pursue DigitalOcean's smaller customers. Additionally, with low-cost AI modeling now available to enterprises that could not previously afford it, the company has positioned itself to attract these customers.

Its challenges and subsequent stock declines have taken DigitalOcean stock to a very low valuation that might have seemed unrealistic during the 2021 bull market. Now that the company is profitable and set to be a leader in low-cost AI, investors may want to consider buying the stock while it trades at current levels.

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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. Will Healy has positions in DigitalOcean. The Motley Fool has positions in and recommends Amazon, DigitalOcean, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.