DigitalOcean's AI Surge Faces A Stiff Test As Street Bets Beyond Guidance

DigitalOcean heads into its third-quarter report with an odd mismatch between its business and its stock. Last quarter's call was the most bullish in a year, featuring a second straight guidance raise, record new annual recurring revenue and a newly launched Inference Engine that signed up thousands of customers within weeks. Yet the shares have fallen about 22% since then while the S&P 500 was flat, leaving investors to decide whether the market is discounting real risks or simply ignoring a company whose numbers keep getting better.

The bar is high. Analysts expect non-GAAP earnings of $0.33 a share on revenue of $307.2 million, which would be growth of roughly 34% from a year ago and a clear step up from the 29% pace posted last quarter. That revenue figure sits at the very top of management's $304 million to $307 million range, and the earnings estimate is above guidance of $0.28 to $0.30. The whisper number of $0.41 is higher still, suggesting the buy side expects DigitalOcean to clear its own outlook by a wide margin, as it did last quarter. Earnings are also likely to come in below the $0.38 earned a year ago, a reminder that this growth spurt is being financed with heavy capacity spending rather than fattening profits.

The operating test centers on whether the acceleration story holds. Management lifted its full-year growth outlook to about 30% from roughly 26% and said the business should exit the year growing 35% or more, with a 50% target for 2027 gaining credibility. For that path to look intact, this quarter needs another strong incremental ARR figure after last quarter's record $93 million, continued expansion in AI customer ARR from $234 million, and evidence that the largest accounts, where million-dollar customers grew ARR more than 200%, are still compounding. Inference is the newest and most important piece. It already makes up more than 70% of AI customer revenue, and the tally of Inference Engine customers, token volumes and attach rates to core cloud services will show whether this is a durable flywheel or an early sugar high.

Remaining performance obligations deserve a careful read. RPO jumped to $894 million from $243 million on the back of the company's first nine-figure annual commitment, but management warned the figure will be lumpy. A flat or lower number would not by itself break the thesis, though investors will want an explanation. More telling will be whether committed capacity of about 155 megawatts comes online on schedule, since the revenue ramp depends on precise data center turn-on timing. Any slippage, combined with component cost pressure and rising capital spending per megawatt, could push revenue toward the low end of the range and weigh on the roughly 39% adjusted EBITDA margin target, which has stayed flat even as growth surged. The 30% GPU price increase should help offset some of that pressure.

Sentiment has warmed noticeably, with bullish readings near 47% versus about 13% heading into last quarter, even as the stock trades below its 200-day moving average near $110 and sits only about 5% above its post-earnings low of $88.34. The trading range has shifted sharply lower from the prior quarter, a sign that enthusiasm for AI infrastructure names has cooled.

Ultimately, the report hinges on whether DigitalOcean can deliver another beat and raise while proving its capacity buildout is arriving on time. A raised Q4 exit rate and steady margins would validate the AI-native cloud narrative and make the recent selloff look overdone. A result merely in line with guidance, or any wobble in capacity timing, would hand skeptics fresh ammunition.

This earnings preview was originally published on Earnings Whispers.

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