DigitalOcean (DOCN)

Cloud computing platform DigitalOcean (NYSE:DOCN) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 15.7% year on year to $229.6 million. Guidance for next quarter’s revenue was better than expected at $237.5 million at the midpoint, 1.3% above analysts’ estimates. Its non-GAAP profit of $0.54 per share was 9.5% above analysts’ consensus estimates.

Company Overview

Built for simplicity in a world of complex cloud solutions, DigitalOcean (NYSE:DOCN) provides a simplified cloud computing platform that enables developers and small businesses to quickly deploy and scale applications.

Data is the lifeblood of the internet and software in general, and the amount of data created is accelerating. As a result, the importance of storing the data in scalable and efficient formats continues to rise, especially as its diversity and associated use cases expand from analyzing simple, structured datasets to high-scale processing of unstructured data such as images, audio, and video.

DigitalOcean competes primarily with large cloud providers like Amazon Web Services (NASDAQ:AMZN), Microsoft Azure (NASDAQ:MSFT), and Google Cloud Platform (NASDAQ:GOOGL), as well as smaller cloud service providers including OVHcloud, Vultr, Linode (owned by Akamai, NASDAQ:AKAM), and Hetzner. In the AI/ML space, it competes with specialized infrastructure providers like CoreWeave and Lambda Labs.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, DigitalOcean’s 23.5% annualized revenue growth over the last five years was solid. Its growth beat the average software company and shows its offerings resonate with customers.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. DigitalOcean’s recent performance shows its demand has slowed as its annualized revenue growth of 13.1% over the last two years was below its five-year trend.

This quarter, DigitalOcean reported year-on-year revenue growth of 15.7%, and its $229.6 million of revenue exceeded Wall Street’s estimates by 1.4%. Company management is currently guiding for a 15.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14.1% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates its newer products and services will not accelerate its top-line performance yet.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

DigitalOcean’s ARR came in at $919 million in Q3, and over the last four quarters, its growth slightly lagged the sector as it averaged 14.2% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

DigitalOcean is extremely efficient at acquiring new customers, and its CAC payback period checked in at 11.6 months this quarter. The company’s rapid sales cycles stem from its strong brand reputation and self-serve model, where it can onboard many small customers with little to no oversight. These dynamics give DigitalOcean more resources to pursue new product initiatives.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

DigitalOcean’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 99.2% in Q3. This means DigitalOcean would’ve grown its revenue by -0.8% even if it didn’t win any new customers over the last 12 months.

DigitalOcean has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

For software companies like DigitalOcean, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

DigitalOcean’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 59.5% gross margin over the last year. Said differently, DigitalOcean had to pay a chunky $40.46 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. DigitalOcean has seen gross margins decline by 0.5 percentage points over the last 2 year, which is slightly worse than average for software.

DigitalOcean’s gross profit margin came in at 59.6% this quarter, in line with the same quarter last year. On a wider time horizon, DigitalOcean’s full-year margin has been trending up over the past 12 months, increasing by 1.7 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

DigitalOcean has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 17.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, DigitalOcean’s operating margin rose by 8.3 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, DigitalOcean generated an operating margin profit margin of 19.6%, up 7.2 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

DigitalOcean has shown impressive cash profitability, driven by its cost-effective customer acquisition strategy that gives it the option to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 20.6% over the last year, better than the broader software sector.

DigitalOcean’s free cash flow clocked in at $84.89 million in Q3, equivalent to a 37% margin. This result was good as its margin was 23.8 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

Over the next year, analysts predict DigitalOcean’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 20.6% for the last 12 months will decrease to 17.8%.

DigitalOcean reported $236.6 million of cash and $1.58 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $361.4 million of EBITDA over the last 12 months, we view DigitalOcean’s 3.7× net-debt-to-EBITDA ratio as safe. We also see its $11.74 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly DigitalOcean blew past analysts’ EBITDA expectations this quarter. We were also happy its annual recurring revenue outperformed Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed. Overall, this print had some key positives. The stock traded up 9.9% to $42.67 immediately following the results.

Updated: December 4, 2025 at 9:22 PM EST

Before investing in or passing on DigitalOcean, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

DigitalOcean has a few positive attributes, but it doesn’t top our wishlist. First off, its revenue growth was solid over the last five years. And while DigitalOcean’s software has low switching costs and high turnover, its efficient sales strategy allows it to target and onboard new users at scale.

DigitalOcean’s price-to-sales ratio based on the next 12 months is 4.8x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $53.33 on the company (compared to the current share price of $46.28).