DigitalOcean stock surges 360% as AI cloud demand accelerates

Small and medium-sized businesses are racing to deploy artificial intelligence software, and DigitalOcean Holdings Inc. is emerging as an unlikely beneficiary. The cloud provider, which has long catered to SMBs overlooked by Amazon Web Services and Microsoft Azure, said its remaining performance obligations hit $800 million at the end of the second quarter — a tenfold increase from a year earlier.

"The demand for AI compute from SMBs is off the charts," Yancey Spruill, chief executive officer of DigitalOcean, said in a statement previewing the company's quarterly results on July 7. "We're building AI data centers as fast as we can."

DigitalOcean generated $257.9 million in revenue during the first quarter, up 22% from a year earlier, and said second-quarter revenue growth accelerated to 29%. AI customers accounted for $170 million of the company's $1.03 billion in annual run-rate revenue at the end of the first quarter, a 221% jump from the prior year. The company's AI-Native Cloud platform, launched this year, features five layers spanning infrastructure to ready-made large language models from partners including Anthropic.

The AI Infrastructure Buildout

DigitalOcean operates 20 data centers equipped with chips from Nvidia Corp. and Advanced Micro Devices Inc., which SMBs can rent through the AI-Native Cloud platform. The company previously guided for 50% revenue growth in 2027 but told investors it plans to revise that forecast higher when it reports full second-quarter results on Aug. 4.

The opportunity is significant because the hyperscalers — Amazon, Microsoft and Alphabet Inc.'s Google — have focused their AI offerings on enterprise customers with the largest budgets. That leaves millions of smaller businesses underserved, a gap DigitalOcean is filling with simplified interfaces and personalized support.

Valuation and Investor Outlook

DigitalOcean shares have gained about 360% over the past 12 months, though they remain 25% below their recent peak. The stock trades at 15.4 times sales, well above its long-term average of 8.5 times since going public in 2021. Based on the company's 2027 revenue guidance, the forward price-to-sales ratio drops to 8.1 — and could fall further if management raises its outlook next month.

The Aug. 4 earnings report will be a critical test. If DigitalOcean delivers another acceleration in AI-related revenue and lifts its long-term guidance, the stock's premium valuation may prove justified. If growth disappoints, the shares could face a sharp correction given how much optimism is already priced in.

This article is for informational purposes only and does not constitute investment advice.