DigitalOcean’s AI Potential: A Game-Changer for Growth

Key Points

• DigitalOcean is well-positioned to grow and scale with its clients who demand increased service capabilities.
• Analysts believe the company is executing well and have raised price targets in early 2025. 
• Company growth stabilized in 2024 and will accelerate in 2025. 

DigitalOcean’s NYSE: DOCN stock price has suffered for years as competition cut into its growth outlook, but the times are changing. Analysts at Morgan Stanley highlighted the deep-value opportunity when firm analysts upgraded the stock to Overweight. They view the stock as a deep value relative to peers, trading at only 20x earnings versus an average near 25x, with a sizeable catalyst ahead. The cloud service provider gets little to no credit for its position in the AI and machine learning industry but is well-positioned to profit and grow with it. 

DigitalOcean’s large clients demand more services and capability quarterly, and the company is executing. The critical detail is that it does so without impacting its well-established core developer business, whose clients also want service and capability to advance. DigitalOcean’s business attractions include a developer-friendly platform with easy-to-use tools, a simplified cloud structure, and cost-saving services for smaller businesses. Those include serverless computing, a service that allows developers to run code without the cumbersome server management. The takeaway is that DigitalOcean is set up to grow and scale with its customers, who include numerous small and start-up developers working diligently to advance AI. 

Morgan Stanley put a target of $41 on the stock, and other recent revisions concur. Stifel Nicolaus analysts issued another notable revision: a price target increase in December 2025. The firm cited DigitalOcean’s, among other software firms, ability to monetize AI. Analysts believe that increased availability and accelerating adoption will sustain industry growth. Their $40 price target is below the $41.70 mid-January consensus but a solid figure that anticipates upside and aligns with trends. The consensus target for DigitalOcean steadily increased throughout 2024 and is tracked higher in the first weeks of 2025, forecasting a 12% minimum upside this year. 

DigitalOcean Growth Stabilizes With Low Bar to Hurdle

DigitalOcean’s growth slowdown is over, and the bar for Q4 and 2025 is set low, providing an opportunity for outperformance and a catalyst for share prices. The 2024 results show growth stabilized at a low-double-digit range, running between 10% and 13%. After revisions from 100% of the covering analysts, the consensus for Q4 is at the low end of the range. Still, acceleration is expected in 2025.

The forecasts for 2025 results were trimmed significantly at the end of 2024 but expect acceleration to 13% and are likely too cautious. The industry is expected to grow at a higher 15% pace in 2025, and that estimate may also be cautious. Digitization, including AI applications and the IoT, is gaining momentum aided by rapidly expanding 5G capability globally. 

DigitalOcean Institutional Investors Drive Price Action in 2025

DigitalOcean’s institutional investors show a relatively high conviction, owning about 50% of the shares. However, the activity in 2024 aligns with the range-bound market conditions, with them buying when the stock was down and selling when it was up. If this continues in 2025, the market may not move higher. However, with growth stabilized and expected to accelerate by the decade's end, the institutions will likely shift their stance in 2025 and revert to a more bullish position. 

The technical outlook is improving. The market for DOCN stock hit a low point in late 2023 and shows rising support within the established range. Price action in mid-2024 and early 2025 aligns with that outlook, including bullish swings in indicators like MACD, stochastic, and closely watched moving averages. Together, they amount to a solid signal, but there is risk. Resistance at the $42.50 and $50 levels could cap gains.