DigitalOcean Holdings, Inc. (DOCN): A Bear Case Theory

We came across a bearish thesis on DigitalOcean Holdings, Inc. on Valueinvestorsclub.com by sondasy. In this article, we will summarize the bulls’ thesis on DOCN. DigitalOcean Holdings, Inc.'s share was trading at $37.84 as of October 8th. DOCN’s trailing and forward P/E were 29.55 and 16.69 respectively according to Yahoo Finance.

DigitalOcean (DOCN) faces a convergence of operational, financial, and governance challenges that collectively undermine its investment case. The company positions itself as a developer-friendly cloud infrastructure provider, offering Infrastructure-as-a-Service, Platform-as-a-Service, GPU rentals, and managed services across the U.S., Europe, and Asia. However, its scale is small relative to hyperscalers, and the majority of its business effectively rents compute and storage capacity with minimal differentiation.

DOCN has relied on aggressive accounting, related-party transactions, and acquisitions like Cloudways and Paperspace to mask a slowing core business and maintain the appearance of growth. Significant scrutiny arises from a web of related-party entities linked to controlling shareholder Access Industries, particularly in China, which may obscure true expenses and artificially inflate margins.

Fundamentally, DOCN’s core growth is faltering. GPU rentals, a key growth vector, face pricing pressure and capacity constraints, while the company lacks the capital or scale to compete with better-financed peers. The upcoming refinancing of $1.5 billion in 0% convertible debt, representing 50% of market cap and 40% of enterprise value, could significantly increase cash burn and amplify leverage risk. Regulatory changes targeting AI GPU sales to China further threaten the growth story, potentially eliminating a material revenue stream.

Accounting shenanigans, including redefinitions of ARR, customer counts, and free cash flow, obscure the company’s true economic performance, with historical cash flow effectively negative. Internal control weaknesses and a revolving door of C-suite executives exacerbate governance concerns, undermining investor confidence.

Taken together, DOCN faces multiple near-term catalysts—including refinancing, secondary stock sales, regulatory shifts, and cash flow pressures—that could drive a severe rerating, with downside scenarios exceeding 60%, potentially leaving the stock near option-value levels relative to its obligations and shrinking market relevance.

Previously we covered a bullish thesis on DigitalOcean Holdings, Inc. (DOCN) by Rene Sellmann in May 2025, which highlighted the company’s developer-focused cloud infrastructure, rising high-value accounts, strong retention, and predictable free cash flow. The company's stock price has appreciated approximately by 31% since our coverage. The thesis still stands as DOCN maintains a profitable niche. Sondasy shares a contrarian view but emphasizes governance, accounting, and balance sheet risks that could impair growth.

DigitalOcean Holdings, Inc. is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held DOCN at the end of the second quarter which was 20 in the previous quarter. While we acknowledge the potential of DOCN as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

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Disclosure: None.