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DigitalOcean (NYSE:DOCN) makes cloud computing less complex. The company describes itself as a cloud infrastructure provider. In reality, the company is decentralizing cloud computing power to a variety of developers, small and large. There are multi-billion dollar companies like GitLab (NASDAQ:GTLB) that use DigitalOcean and small startups like autonomous driving startup Ghost. Overall, I like the future of the company and think there are a variety of customers they can serve across the world. With increased investor confidence and further growth, Digital Ocean can further become an international player and offer the lowest cost of cloud computing access for developers everywhere. The quest of the company, in my opinion, is a noble one and I have no problem supporting them. By decentralizing cloud computing, the company is helping usher in a new standard of technology offered by companies to consumers. Overall, the value of their product portfolio should stimulate growth for the foreseeable future.

The growth at a low cost mentality by management has been a risk-less endeavor. The company has successfully commercially navigated their product portfolio to become the lowest cost cloud computing service for small development teams everywhere. With VPN hosting options ranging from data base hosting to scalable virtual machines. The variety of products is a differentiator compared to Azure (NASDAQ:MSFT) and Amazon Web Services (NASDAQ:AMZN). Overall, there is still plenty of opportunity for disruptors in the market.

DigitalOcean Q3 Earnings Presentation

Source: (DigitalOcean Q3 2021 Earnings Presentation)

There is a rapidly growing demand for cloud computing. Everyday developers are required to engage in increasingly more complex problems because programming is such a rapidly changing field. The company's market opportunity is huge, and moving forward, I would look for DigitalOcean's market capitalization to grow with the massive market share opportunity the company has. With a 27% yearly CAGR, it is easy to see the market opportunity players in the cloud computing space have to generate long-term profits.

DigitalOcean Q3 Earnings Presentation

Source: (DigitalOcean Q3 2021 Earnings Presentation)

The accelerating top-line growth will continue as the cloud computing as a service industry grows. In addition, the variety of product offerings the digital ocean has within their cloud computing offers is taking back customers that have been lost to competitors due to complexity issues. I believe the recent setbacks in the company and the stock have generated a great buying opportunity for investors.

DigitalOcean Q3 Earnings Presentation

Source: (DigitalOcean Q3 2021 Earnings Presentation)

There are a variety of fundamental performance factors that have not been priced into the stock. Scaling ARR has improved by 36% YoY and is a sign of a healthy young enterprise. Currently, the company is scaling faster than expected CAGR, but I think that's fine. Analysts don't necessarily know what the cloud computing as a service industry will look like, and DigitalOcean has the potential to roll out more product offerings for consumers. There is long-term growth in DigitalOcean's consumer base, and the financial metrics, along with the operational metrics, show a strong picture of future growth.

DigitalOcean is a high-margin growth company with a solid earnings base. The company was profitable even before the IPO and remains so. I believe earnings can accelerate due to strong top line growth. Overall profitability is not a problem for DigitalOcean, unlike so many other software companies. At today's current 8 billion dollar valuation, DigitalOcean is undervalued relative to future prospects.

DigitalOcean Q3 2021 Earnings Presentation

Source: (DigitalOcean Q3 2021 Earnings Presentation)

There has been strong scalability and profitability. Even though the company is scaling at a rapid pace, the company's profitability has only increased. This is due to DigitalOcean's high margin business model, which requires very low costs. This is due to the SaaS ARR model that the company uses to scale relationships with its customers by using their full technology stack.

DigitalOcean Q3 Earnings Presentation

Source: (DigitalOcean Q3 2021 Earnings Presentation)

An important part of maintaining customers is ensuring their success. Customers have been staying, and DigitalOcean has done a great job of increasing their rates while maintaining customer satisfaction. The company remains the lowest-cost solution for cloud computing services and will remain so for some time. Overall, the digital infrastructure the company provides is essential for many startup developers and corporate developers alike.

There are risks due to the nature of the macroeconomic picture in the next 12 months. With the now rumored four rate hikes, there will be a large rotation out of technology stocks that could persist for some time. Tech stocks that generate consistent profits, on the other hand, will be rewarded, and I believe DigitalOcean is a great small-cap way for investors to potentially balance a mega-cap tech-heavy portfolio with a more high-growth option. Overall, the opportunities for DigitalOcean are massive and I believe the company could change technology entrepreneurship for the better. By decentralizing cloud services, we offer developers around the world access to cloud computing power that had previously only been accessed by major technology institutions. I believe DigitalOcean could be the start of a larger trend for technology development that could challenge the existing technology giants that oligopolize the existing technology stack for developers.

As mentioned, the four rate hikes could create a volatile valuation picture in 2022. However, I am of the opinion that DigitalOcean could work past this and actually have a successful 2022. With its improving operations and rapidly improving EPS, the valuation picture could naturally improve. I believe the new organic growth through high debt that has been allowed to be taken out by companies will pay off. Inflation will persist because the fed will get interest rates under control. However, certain companies will surely not become less valuable due to the rate hikes. This is the opportunity for technology investors to take advantage of the rotation out of growth and pick up stocks at low prices. For my comparison, I used two data center services providers for consumers. First, Wix.Com (NASDAQ:WIX) helps small business owners build websites to promote and scale their business. The variety of offerings Wix has gives small business owners the opportunity to own their own storage at a data center for an ARR cost. GDS Holdings Limited (NASDAQ:GDS) is a leading Chinese operator of data centers, primarily for businesses. Both of these companies are valued at under 10 billion, so they experience similar price fluctuations as investors get in and out of the profitable small tech sector.

Seeking Alpha

Source: (DigitalOcean Seeking Alpha Total Return Peer Comparison)

Overall, DigitalOcean has produced a higher return than both of its competitors during 2021. This is due to the strong demand for DigitalOcean's products due to their low cost and scalability. Even though momentum has been deescalating due to a rotation to value, DigitalOcean should hold up over the medium to long term.

Seeking Alpha

Source: (DigitalOcean Seeking Alpha EV/EBITDA Peer Comparison)

Even though DigitalOcean has been on a massive run, its valuation hasn't increased that much. This is due to the company's strong sales numbers. The sales numbers have been driving stock price growth due to the higher margins of the business. This is a great sign for the stock moving forward, even in the face of macro pressure. DigitalOcean is one of my favorite small-cap stocks for 2022.

Investors can't go wrong with DigitalOcean - strong earnings with a relatively low valuation. Most developers I talk to know about DigitalOcean and are strong believers in their products. The company, on a fundamental basis, checks out. I am long DigitalOcean and rate the company as very bullish. I look forward to analyzing reports from the company moving forward.

Read more:
DigitalOcean: The Decentralized Future Of Technological Innovation - Seeking Alpha