The $47B SMB public cloud spend market is a focused opportunity for new IPO Digital Ocean $DOCN, with attractive valuation in a competitive market

Price: $44.34
Market Cap: $4.6B
52 W L – 52 W H: $36.65 - $47
Shares Outstanding: 105M

$DOCN was founded in 2012 by Ben and Moisey Uretsky, in New York has 609 employees and 572,960 Customers.

Digital Ocean IPOed on March 24th 2021

$DOCN provide core compute/storage (IaaS) and Platform (PaaS) cloud offerings to SMB with a developer first focus on simplicity and customer service

$DOCN: The public cloud is going from 33% to ~50% of the $1.1T addressable IT Spend by 2024

It is a secular shift for SMB and enterprises away from on premises data centers

$DOCN focuses on a large TAM in core IaaS/PaaS market with opportunity down-market targeting SMB and developers

$DOCN: The SMB cloud market is about $115B for IaaS and PaaS with SMBs alone spending about $47B according to IDC and is growing faster in adoption than enterprise

$DOCN The landscape however is supremely competitive split between

a) the higher-cost, hyperscale providers (AWS, Azure, GCP), and

b) lower-cost offerings (AWS Lightsail, VULTR, Linode).

$DOCN is starting to gain preference as a preferred non-hyperscale public cloud vendor by cloud-native developers who like the multi-cloud strategy to reduce risk

$DOCN platform has evolved beyond core compute/storage (IaaS) and up the stack into PaaS since its founding

$DOCN has a large developer-focused and engaged user community with 5M unique monthly visitors and over 200 developer tools

$DOCN differentiates itself from large hyper scale providers with Simplicity, Community, Customer Support, and Open Source

$DOCN has 5M monthly unique developer community visitors, 6K developer written tutorials and technical guides, 28K community‐ driven Q&A

$DOCN has a large data center footprint with 14 data centers (excluding backup centers)

$DOCN Go-to‐market model features efficient self‐service customer acquisition and expansion, S&M spend (9.9% in FY20). 80% of sales are self‐service, & ~20% sales‐assisted

$DOCN : 570K Customers Acquired with self-service GTM motion have resulted in low S&M expense 8.9x LTV:CAC

$DOCN key metrics include recurring revenue, retention rate, customer growth and average revenue per customer

$DOCN this has resuled in consistent APRU uplift, supported by rapid IaaS and PaaS adoption

Expansion within the customer base is increasingly a part of the story, as the Company has increased net dollar retention from ~100% in FY18/FY19 to 105% exiting FY20, while keeping churn stable at 14% (gross retention 86%)

$DOCN has a large, global customer base with no meaningful concentration, top ~15% customers making up ~85% of revenue

$DOCN GAAP gross margins will improve to 66% in 2023, up from 54% in 2020 on Capex leverage

Invest once and payback over time

$DOCN trades at a discount to comp median of ~18x and 0.65x on a growth adjusted basis, given the higher capital intensity of business & its higher churn relative to peers

$DOCN trades inline with peers as measured on EV/Sales vs Gross Margin %

$DOCN has a strong management team with CEO Yancey Spruill (2019), former CEO of SMB vendor SendGrid, acquired by $TWLO

Bill Sorenson/CFO and Carly Brantz/CMO

$DOCN Risks: Competitive pressures with high churn in SMB customer base with high CapEx spend

$DOCN Bull and bear thesis provides a good opportunity on weakness with $50 - $52 PT by Dec 2021

$DOCN summary:
1. SMB focused large TAM opportunity
2. Competitive market, but unique offering and focus
3. Low cost customer acquisition
4. Attractive valuation relative to peers
5. Recent IPO building a base

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