Home Business DigitalOcean (DOCN) – The Shopify of Cloud Computing

DigitalOcean (DOCN) – The Shopify of Cloud Computing

DigitalOcean Holdings Inc (NYSE:DOCN) – The Shopify of Cloud Computing; $200 Price Target

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Citron - Learning from Our Mistakes

One of the greatest blunders we’ve made over the past 20 years of publishing Citron Research is not realizing the power of Shopify when the stock was $100. At the time it seemed like another overpriced software company that allowed people to perform the simplest of tasks… making websites. What we failed to recognize and attribute enough value to was that:

  1. Customers LOVED the product
  2. The Small and Medium Sized Business (SMB) market was a lot larger than we anticipated and could work through its own churn
  3. The power of a passionate and dedicated developer network
  4. The ease of cross selling once a large customer base was established

Congratulations to everyone who owned Shopify through the years. Citron has been waiting patiently for another company to come along with the same profile, hoping with fingers crossed that valuation would be investible… and it has finally come to market.

Enter DigitalOcean - The Shopify of Cloud Computing

DigitalOcean (DOCN) is a cloud computing platform purpose-built for SMBs (i.e., the Shopify of cloud computing or AWS for SMBs) at a fraction of the cost of large cloud providers.

The transformation to the cloud for large enterprises is obviously already on its way. Just look at Amazon with Wall Street analysts estimating the value of AWS at $700-800 billion.

The next wave is the SMB transformation to the cloud and multi cloud.

We’ve seen this movie before and just like how Shopify and Square saw that SMBs were not far behind large enterprises in adopting ecommerce and digital payments, DigitalOcean is in the leading position to capitalize on this mega trend.

Keep It Simple Stupid

“Simplicity is the ultimate sophistication. It takes a lot of hard work to make something simple, to truly understand the underlying challenges and come up with elegant solutions.” – Steve Jobs

Simplicity has become the key to winning in the SMB market. While AWS sells a product that is not just expensive but also very difficult to use, DigitalOcean, like Shopify has created an easy solution for SMBs to embrace cloud technology.

NYSE:DOCN

Compare Shopify 2015 IPO Roadshow Presentation to DOCN Today:

Shopify 2015 IPO Roadshow Presentation

NYSE:DOCN

NYSE:DOCN

DigitalOcean Q1 2021 Earnings Presentation

DigitalOcean

DigitalOcean

https://s27.q4cdn.com/572064924/files/doc_downloads/shopify_overview_nov.pdf

https://s27.q4cdn.com/619704647/files/doc_financials/2021/q1/Q1-21-DOCN-Earnings-Presentation.VF.pdf

Citron would argue that the SMB customer for DOCN is stickier than SHOP because a startup that needs cloud is more advanced than a drop shipper or small entrepreneur.

***It is SO OBVIOUS to Citron what is about to happen to DOCN stock.

Look at the above chart at the growth of PaaS. As stated by management in last earnings call:

“Roughly 90% of our revenue comes from the core compute network and storage solutions that are typically called Infrastructure as a service. 10% are Kubernetes, our Database as a Service. And that piece of the revenue pie is growing significantly higher than our overall growth rate. And that reflects that fact we have a growing customer who is building off their business”

https://seekingalpha.com/article/4426204-digitalocean-holdings-inc-docn-ceo-yancey-spruill-on-q1-2021-results-earnings-call-transcript

The PaaS part of the DigitalOcean business is the high margin and high growth part of the business that will make DOCN the real AWS for SMBs.

The Shopify of Cloud Computing (i.e., AWS for SMBs)

When Citron initially published on Shopify, we were most surprised not by the enthusiasm of the shareholders, but rather the passion of the end users. Who gets so passionate over software???

After speaking with former employees, customers, and even the competition, we have found that DigitalOcean’s customer base is even more passionate and evangelical than that of Shopify, which leads us to believe that DigitalOcean will become the dominant SMB cloud provider.

We were given the analogy during our calls with industry experts that using AWS is like operating a Boeing 747 (i.e., too many functions/switches/controls) while using DigitalOcean is like driving a car (i.e., relatively idiot-proof).

A customer who spends $500K annually with DigitalOcean told us that DigitalOcean is his biggest cloud provider spend by far as it’s the easiest to use and on average is half the cost of the big cloud providers for the same service. We see a similar sentiment from DigitalOcean customer Parabol who moved over from Amazon’s AWS:

“The hosting option became DigitalOcean simply because the product was so easy and friendly to manage – all at the right price”

https://www.digitalocean.com/customers/parabol/

Below are some of the DigitalOcean’s positive customer testimonials:

  • "What we really like about DigitalOcean is the keen customer focus. As a company that serves developers, we want a partner that understands our customers and has a shared purpose. DigitalOcean not only provides world-class infrastructure but they truly get developers. This makes our job easier in terms of building management services for them.” - Roxana Ciobanu, CTO of BunnyShell
  • “With DigitalOcean, we get a low-cost option with great support and reliability.” - Director of Education & Awareness, Molly Wojcik
  • “We had been growing 10 to 20% a month. And every step of the way, DO had tools that were exactly what it was right. We came for the simplicity and then, as we scaled, we were actually very pleasantly surprised by many things on the platform” - Daniel Ni, CEO & Founder of Scraper API
  • “As a founder, I didn’t want to spend time micromanaging infrastructure and doing XML sit-ups. When the pandemic happened and traffic grew tenfold, the robust DigitalOcean platform allowed us to scale seamlessly, without any disruption to our operations, so we could continue to focus on running our business.” - Jordan Husney, Cofounder & CEO of Parabol

Read the full report here by Citron Research

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver