The market for cloud-computing infrastructure to power applications has grown immensely since Amazon introduced its first cloud services in 2006, but U.S. investors haven’t had a great way of investing exclusively in cloud.
That will change in the coming weeks when a company called DigitalOcean starts trading on the New York Stock Exchange under the symbol “DOCN.”
Buying shares of Amazon — or Alibaba, Google, IBM, Microsoft or Oracle — has meant getting a small percentage of exposure to the public cloud. DigitalOcean is different because it doesn’t do anything else.
The company will start out with a much lower valuation than those other companies. In a Monday update to the prospectus for its initial public offering, DigitalOcean said it expects to sell shares at $44 to $47 per share, which would give it a market cap of about $4.8 billion at the middle of the range. DigitalOcean also said Tiger Global and an entity tied to existing investor Access Industries want to buy up to $175 million in the company’s shares at the time of the IPO.
Unlike public cloud market leader Amazon Web Services, DigitalOcean is not profitable. It lost almost $44 million in 2020, compared with a $40 million loss in 2019. DigitalOcean is also growing more slowly than AWS, despite that AWS generates 142 times more revenue. AWS revenue in 2020 totaled $45.37 billion, up 29.5%, while DigitalOcean reported 25% revenue growth.
That might be okay, because DigitalOcean has a specialty: Simplicity. It isn’t overwhelming to new users, who wind up increasing the amount they spend on DigitalOcean services over time.
Simplicity is one of the four principles the founders picked when DigitalOcean started in 2012. “We take infrastructure technology and make it simple across all aspects of the product experience,” CEO Yancey Spruill, a former operating chief and finance chief at SendGrid, wrote in a letter to investors in the prospectus.
A handful of products
Since 2006 AWS has introduced a wide swath of services for software developers to adopt, and its customer list has gotten long, with big names like Apple paying hundreds of millions per year.
That’s not DigitalOcean’s path. It has just a handful of products, including customizable Linux-based virtual machines that it calls droplets, data-storage options, networking tools and three databases. Unlike on Amazon, there are no machine-learning services, deployment tools, database-migration technologies or media-transcoding systems. It maintains 6,000 tutorials designed to help people get going.
DigitalOcean also tries to stay simple with pricing and the bills it sends each month to its nearly 600,000 customers.
DigitalOcean took a swipe at the big public-cloud vendors in its prospectus, saying their products aren’t intuitive enough for sole developers and small businesses and “suffer from near-infinite feature complexity and have opaque pricing and billing practices that are often accompanied by significant hidden costs.” As a result, the company said, small businesses are often unable to enjoy the benefits of cloud computing.
“Companies frequently need dedicated employees, pricing analytics tools or even specialized consultants to understand how products are priced and how to manage their bills,” it wrote.
If DigitalOcean has found a sweet spot, it’s with small businesses, rather than large enterprises, which the big clouds have been fighting over in the past few years. It’s a self-service business that doesn’t rely heavily on a large group of salespeople. In that way it will be like website-building company Wix and e-commerce software maker Shopify.
The New York-based company also has foreign reach. Rather than touting S&P 500 clients in its prospectus, DigitalOcean showcases customers such as Bunnyshell of Romania, Cloudways of Malta, Jiji of Nigeria, Vidazoo of Israel and Whatfix of India. In 2020 38% of DigitalOcean’s revenue came from North America; by comparison, 68% of Amazon’s 2020 revenue came from the U.S.
DigitalOcean has yet to take major share in the cloud infrastructure market, though, and some of its customers could end up switching to more comprehensive cloud providers as their needs evolve.
But DigitalOcean is hopeful. In the prospectus the company said it expects more than 14 million small and medium-size businesses to be formed each year, and their founders don’t necessarily come with sharp technical skills. “These individuals are able to leverage simple and reliable development tools and the widespread availability and significantly lower upfront cost of cloud computing to start companies,” the company said.
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