Why DigitalOcean Stock Is Skyrocketing This Week

Key Points

• DigitalOcean's sales grew by double digits in the second quarter, and its profitability is booming.

• Its largest customers grew their sales with the company even faster during Q2.

• If DigitalOcean can continue to attract larger customers, the sky could be the limit for the growth stock.

• 10 stocks we like better than DigitalOcean ›

The leader in simplified cloud computing platforms, DigitalOcean (NYSE: DOCN), saw its stock rocket 27% higher this week as of 11 a.m. ET Friday, according to data provided by S&P Global Market Intelligence.

DigitalOcean reported second-quarter earnings on Wednesday with sales and net income rising 14% and 95%, respectively. Now sporting a net income margin of 17%, DigitalOcean blew past analysts' expectations, and the stock rocketed higher.

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Looking ahead to the full year, management raised sales expectations to 14% from 13% while lifting the midpoint of its earnings per share guidance 9% higher.

DigitalOcean's outstanding Q2

DigitalOcean offers a "simplified, scalable, and approachable" cloud computing platform to its digitally native enterprise (DNE) customers.

The simplicity of its cloud platform and artificial intelligence (AI) solutions sets them in stark contrast to the complex offerings provided by its hyperscale cloud computing peers.

Image source: Getty Images.

By focusing on smaller DNEs with its streamlined cloud computing solutions, DigitalOcean has carved out a leadership position in its niche of the cloud market.

However, the company's Q2 results show that DigitalOcean's solutions are becoming more popular among its larger customers.

Its largest customer cohort, Scalers+ (those spending over $100,000 annually), grew revenue by 35% during the quarter.

Helping to lead this growth charge, 64 of its 100 largest customers added a new offering from the company over the last year, and 26 of its largest 100 did so in Q2 alone.

These are excellent signs that suggest larger DNEs see the value provided by DigitalOcean and are not immediately defecting to the hyperscalers as they grow.

This promising development, paired with DigitalOcean's AI and machine learning sales more than doubling in Q2, makes the company an intriguing investment at 16 times next year's earnings.

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Josh Kohn-Lindquist has positions in DigitalOcean. The Motley Fool has positions in and recommends DigitalOcean. The Motley Fool has a disclosure policy.