1 big risk for DigitalOcean Stock |  The motley fool

1 big risk for DigitalOcean Stock | The motley fool

The main selling point of DigitalOceanit is (DOCN 1.78%) cloud computing platform is simplicity. Cloud Computing Giants Amazon Web services and Microsoft Azure is great for enterprises, but for developers and small businesses with limited resources, it can be a nightmare. Hundreds of overlapping products and services introduce a steep learning curve, and pricing is often opaque and unpredictable.

DigitalOcean, on the other hand, offers a small set of basic cloud services with easy-to-understand pricing. It’s easy to get started and there are few customers stuck if they’re unhappy. With the acquisition of Cloudways, DigitalOcean is doubling down on simplicity by expanding its portfolio of managed cloud services that make life even easier for developers.

DigitalOcean’s pitch is good. By 2025, spending by individuals and businesses with less than 500 employees on infrastructure-as-a-service and platform-as-a-service is expected to reach $145 billion. Much of that spending will go to cloud platforms that don’t complicate things, and DigitalOcean aims to be the top pick.

The biggest risk for DigitalOcean isn’t competition from AWS and other mega-platforms — it’s competition from the multitude of cloud companies vying for the same customers in search of simplicity.

An explosion of competition

DigitalOcean has never been entirely alone in its part of the cloud computing market. Linode, a direct competitor that offers the same style of simple cloud computing, was founded about eight years before DigitalOcean. Linode has been acquired by the CDN giant Akamai earlier this year, combining a simple cloud computing platform with one of the cutting edge IT companies.

Private company Vultr, another simplicity-focused cloud computing platform, was launched a few years after DigitalOcean. Many companies also offer cloud hosting in addition to their basic services. Domain Registrar come on daddyfor example, sells cheap virtual server plans.

In short, if you’re a developer who needs to spin up a virtual server quickly and inexpensively, you have a tremendous number of options. DigitalOcean stands out for its huge catalog of content, guides, articles and tutorials. A potential customer who finds DigitalOcean through its content useful may be less likely to consider alternatives.

The biggest issue for DigitalOcean, however, may be cloud platforms that take simplicity to the next level. DigitalOcean offers its Application Platform, which allows customers to deploy applications without having to manage servers, and Functions, which takes it a step further and allows customers to deploy smaller pieces of code. But these are features of the platform, not the guiding principle.

Once you dive into the world of cloud computing platforms that eliminate the concept of a server entirely, your options explode. Many of these platforms are ultimately powered by AWS or another larger cloud platform, which speaks to the value customers derive from simplicity.

Heroku is the ancestor of all these platform-as-a-service providers. The company exists since 2007 and was acquired by Selling power in 2011, the same year DigitalOcean was founded. Developers submit their app code to Heroku, and the platform handles building and deploying the app. There are no servers to manage and a minimum of choices to make.

Heroku is far from the only game in town. Similar platforms include Fly, Render, and Railway. Each of these platforms focuses on deploying applications without too much hassle, and some offer services like managed databases that bring together everything a developer needs under one roof.

Going even further down the rabbit hole of cloud abstraction, platforms like Netlify, Vercel and Cloudy Workers are built around cloud functions. Instead of an application running all the time in the cloud, these platforms run chunks of code on the fly as requests come in. Customers only pay for the resources they actually use, which in some cases can be significantly cheaper than the alternatives.

Fight on two fronts

DigitalOcean sits midway between heavyweight cloud platforms like AWS and ultra-simple cloud platforms like Cloudflare. It’s not a bad place, but it does mean the company will lose two types of customers: businesses that need advanced cloud services and developers who want the simplest experience possible.

The good news is that the market is huge. DigitalOcean doesn’t need a dominant market share to grow its revenue to billions of dollars in the years to come. The risk is that the company’s platform fails to attract too many potential customers: too simple for some, not simple enough for others.

Still, it’s hard to argue that DigitalOcean isn’t a reasonable investment, given its growth potential. Priced at around 5x annual sales and steadily growing at over 30% per year, you could do a lot worse than bet on this developer-centric cloud company.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Timothy Green has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon.com, Cloudflare, DigitalOcean, Microsoft and Salesforce. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.

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