This artificial intelligence (AI) stock looks like a marquee buy after its latest pullback

Cloud computing platform provider Digital Ocean (NYSE:DOCN) has had an unforgettable stock market year so far. The stock fell 10% after DigitalOcean reported its third-quarter results on November 4. And so far in 2024, stocks are up just 7%.

But it seems that the market underestimates the immense growth potential of the cloud computing provider and the good results it has achieved in recent times. A closer look at the company’s results will allow us to see that its recent performance did not merit such liquidation.

Let’s look at the reasons.

DigitalOcean is growing at a healthy pace and AI could give it a nice boost

DigitalOcean’s third-quarter 2024 revenue increased 12% year-over-year to $198 million, while its adjusted profit increased 18% from the same quarter of the year last to reach $0.52 per share. The company’s revenue exceeded its forecast range of $196 million to $197 million, while net income was significantly above the earnings per share estimate of $0.40.

Better yet, DigitalOcean raised its forecast for the full year. It expects to finish the year with revenue of $776 million, up from $772.5 million previously expected. Non-GAAP (adjusted) earnings are now expected to be between $1.70 and $1.75 per share, compared to a prior expectation of $1.60 to $1.70 per share.

So it was perplexing to see a selloff in DigitalOcean shares after its up-and-coming quarter, especially given the company’s focus on offering artificial intelligence (AI) solutions. based on the cloud should help it capture a greater share of customers. wallets. DigitalOcean’s cloud computing platform is used by start-ups, developers and small and medium-sized businesses, with the company providing both infrastructure-as-a-service (IaaS) and platform solutions. as a service (PaaS).

Customers use DigitalOcean’s platform to build, scale and deploy applications while also purchasing networking, compute and storage services from the company. And now DigitalOcean also offers virtual machines powered by NvidiaThe popular H100 graphics processing units (GPUs) from via a service known as GPU Droplets.

It is an on-demand service with which customers can access DigitalOcean’s GPU infrastructure to train and deploy AI models, data analysis, deep learning and high-performance computing . DigitalOcean says this on-demand offering is available at $2.99 ​​per GPU per hour, and customers can scale as needed.

GPU Droplets allows users to build chatbots, train large language models (LLMs), and generate images and videos, among others. Additionally, DigitalOcean recently launched a generative AI product called GenAI Platform, which will allow users to create AI agents using its GPU infrastructure. The company provides customers with access to popular models such as Llama 3.1 and Mistral NeMo through this offering, which customers can use to create custom AI agents using their first-party data.

These are smart steps taken by DigitalOcean to tap the rapidly growing AI market. Its customers won’t have to break the bank to train and deploy AI models, as the company offers them access to powerful GPUs while also allowing them to build and customize applications using foundational models .

The good part is that this strategy seems to lead to increased customer spending. The company’s average revenue per user (ARPU) increased 11% year-over-year in Q3 2024 to $102.51. It’s worth noting that DigitalOcean’s ARPU increased over the year, from $95.13 in Q1 to $99.45 in Q2 and triple digits last quarter.

It will not be surprising to see this trend continue in the future as the company expects a healthy increase in its market opportunities in the future. DigitalOcean highlights that cloud spending by individuals and businesses with fewer than 500 employees could reach $114 billion in 2024 and grow at an annual rate of 23% to reach $213 billion in 2027.

Integrating AI tools within its cloud computing platform could help accelerate its growth and improve its growth prospects, which is why it might make sense to buy the stock now.

Why you should consider buying this stock now

DigitalOcean currently trades at 21 times forward earnings, meaning it can be bought at a discount to tech investors. Nasdaq-100 the index’s forward earnings multiple of nearly 30. Buying these AI stocks at this valuation could prove to be a smart move, as the company’s earnings growth rate is expected to improve in the future.

DigitalOcean’s 2024 earnings estimate suggests a potential jump of 8.5% from the 2023 reading of $1.59 per share. However, forecasts for the next two years suggest its net growth will eventually accelerate to reach double digits in 2026.

DOCN EPS estimates for current fiscal year data by YCharts

Additionally, consensus estimates project that DigitalOcean’s earnings will grow at an annual rate of nearly 14% over the next five years, although it won’t be surprising to see the company do better than that, thanks to a new catalyst in the form of AI. . So, investors looking to buy a tech stock that trades at an attractive valuation and could benefit, in the long run, from a boost from AI, should consider taking a closer look at DigitalOcean after its latest fallback.

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Harsh Chauhan has no position in any of the securities mentioned. The Motley Fool ranks and recommends DigitalOcean and Nvidia. The Motley Fool has a disclosure policy.