Hook + thesis
DigitalOcean is no longer just a developer-friendly cloud for SMBs — it is an under-the-radar beneficiary of the AI infrastructure buildout. The company has reported AI revenue that has doubled for five consecutive quarters and is actively positioning to capture customers leaving Heroku after Salesforce moved the product into sustaining engineering. That mix of recurring developer demand and accelerating AI services creates a real and durable catalyst for upside.
Trading at $58.51 today with a market capitalization in the roughly $5.3 billion range, DigitalOcean offers a trade that balances momentum and fundamentals: buy into AI-driven revenue acceleration with a strict stop and a clear target. The setup favors a long-term swing anchored to 180 trading days, where the combination of product migrations, solid customer metrics and improving free-cash-flow dynamics can drive multiple expansion.
What the business does and why the market should care
DigitalOcean provides cloud infrastructure primarily to small and mid-sized businesses and developers across the U.S., Europe and Asia. It focuses on simplicity and predictable pricing, serving roughly 640,000 customers with a high net dollar retention rate (about 99%). That customer profile is attractive: predictable, sticky revenue from many smaller accounts is less binary than hyperscaler deals and scales well as developers adopt AI workloads.
The reason the market is paying attention now is twofold. First, DigitalOcean's AI revenue has reportedly doubled for five consecutive quarters, transforming it from a niche IaaS provider into a meaningful player for certain AI workloads. Second, macro and industry events are creating migration opportunities: Salesforce's decision to stop development on Heroku (reported 02/18/2026) opens a sizeable migration path to DigitalOcean's App Platform. The company has already published migration guides and incentives to convert Heroku users — a low-cost source of new customers.
Hard numbers that matter
- Current price: $58.51. Previous close: $62.74. 52-week range: $25.45 - $70.43.
- Market cap: ~$5.34 billion. Enterprise value: ~$6.83 billion.
- Profitability & cash flow: earnings per share around $2.75 and reported free cash flow of $175.45 million.
- Valuation multiples: price-to-earnings near the low-to-mid 20s (P/E roughly 22-25x depending on reference price); price-to-sales around 6.6x.
- Customer and growth signals: roughly 640,000 customers and a reported net dollar retention rate of 99%, along with consistent revenue growth (company commentary has cited ~15% year-over-year growth in recent periods).
- Technicals: 50-day simple moving average at $55.33, 10-day SMA ~$64.30, RSI ~47 (neutral). MACD shows short-term bearish momentum but price recently traded down to the low $58s after intraday volatility.
Valuation framing
At a market cap around $5.3 billion and free cash flow of $175 million, DigitalOcean is generating real cash, unlike many pure-play AI infrastructure names that remain heavily loss-making. The current P/E in the low-20s suggests the market is baking in continued profitable growth rather than hypergrowth. Compared with its own history, DOCN has moved up sharply from the 52-week low of $25.45 in 2025 to recent highs near $70 — much of that move is tied to AI narrative expansion. The present valuation is not cheap on absolute multiples, but it is reasonable for a profitable cloud provider showing accelerating AI monetization and strong customer retention.
Qualitatively, the premium versus older SMB-cloud multiples reflects (a) the AI revenue trajectory and (b) the defensibility of a broad base of smaller customers who are sticky and multiply usage as they adopt GPU/AI workloads. If AI revenue keeps doubling in the near term, the current multiples look easy to justify; if it stalls, the market could re-rate DOCN lower quickly.
Catalysts (that could drive the trade)
- Heroku migration wave - Salesforce's pivot (reported 02/18/2026) could accelerate App Platform adoption and drive higher average revenue per user as migrating apps scale.
- Continued AI revenue momentum - management commentary and continued quarter-to-quarter doubling would validate the thesis and justify multiple expansion.
- Quarterly beats on top- and bottom-line - DigitalOcean has a recent track record of beating estimates; another strong print can flip sentiment.
- Enterprise deals and partnerships that expand GPU capacity or distribution, particularly in Europe and Singapore, would reduce capacity constraints and boost revenue visibility.
- Positive analyst revisions and more bullish coverage as AI metrics become more measurable and recurring.
Trade plan (actionable) - exact prices and horizon
Trade stance: Long.
- Entry price: $58.51 (current market price).
- Stop loss: $53.00. Hitting this level signals a failure to hold the $50s and would likely cancel the momentum thesis.
- Target price: $75.00. This represents upside from current levels and is consistent with a multiple expansion to the mid-20s if AI revenue growth sustains.
- Horizon: long term (180 trading days). Expect the trade to take several quarters to fully play out as product migrations, new customers, and quarterly AI revenue disclosures materialize.
Why 180 trading days? Migration cycles, visibility into GPU capacity, and sequential AI revenue prints take time to move revenue mixes and investor conviction. A 180-trading-day horizon allows for two sequential quarterly reports and tangible proof that AI monetization is durable rather than transitory.
Risk framing - what can go wrong
- AI revenue stalls: If the reported AI revenue growth decelerates or fails to convert into recurring revenue at scale, investors may reduce multiples quickly.
- Competition and price pressure: Hyperscalers and other specialized AI cloud providers could undercut pricing or capture developer mindshare for GPU-heavy workloads, pressuring DigitalOcean’s growth and margins.
- Execution risk on migrations: Converting Heroku users is not automatic; poor migration tooling, slower uptake, or unexpected customer churn during migration would blunt the upside.
- Capacity constraints: If DigitalOcean cannot scale GPU capacity in lock step with demand, customers may be forced to other providers, limiting revenue upside and increasing costs.
- Macro volatility: A risk-off market could compress multiples across software and cloud names even if DigitalOcean's fundamentals remain intact.
Counterargument to the thesis
One plausible counterargument is that DigitalOcean's AI revenue is concentrated in early-stage workload adoption and may be front-loaded. If customers adopt AI tooling but choose hyperscalers for high-scale training or latency-sensitive inference, DigitalOcean's role could be peripheral. In that scenario, the market would re-rate DOCN to a lower multiple closer to legacy SMB-cloud comps, and the current valuation would look stretched.
What would change my mind
I would materially reduce exposure if one or more of the following happens: a quarter with AI revenue deceleration vs. expectations, visible churn among mid-size customers, or a sustained breakdown below $53 on heavy volume. Conversely, I would add to the position if DigitalOcean reports a quarter showing AI revenue increasing faster than consensus, upgrades to guidance, or a meaningful new distribution partnership that accelerates migrations.
Practical trade mechanics and risk control
Use position sizing so that the stop loss at $53 limits downside to an acceptable percentage of portfolio capital. Given the share's historical volatility and active short interest (short interest on recent settlement dates has hovered near 9.6-9.7 million shares with days-to-cover in the low single digits), expect occasional sharp moves and manage otherwise with limit orders. Monitor quarterly filings and management commentary for AI revenue cadence and capacity plans.
Bottom line
DigitalOcean is a practical way to take a measured swing at the AI infrastructure story without buying a high-burn, speculative midcap. The combination of profitable operations, free cash flow, strong customer retention, and accelerating AI revenue supports a long biased trade. Enter at $58.51, protect with a $53 stop, and target $75 over the next 180 trading days — this reflects a conviction that migrations and AI adoption will drive durable upside while keeping risk defined.