2022 Outlook - DigitalOcean

Last updated on by Christian Koch

DigitalOcean hit the public markets with its March 2021 IPO on the NYSE. Before that, and after a rocky few years playing musical chairs with CEOs and executives, the company ended up hiring a former SaaS (SendGrid) CFO as its new CEO, who has been doing a fair job. The company has positioned itself as an alternative cloud provider, serving small and medium business, a market IDC says it worth $44B today, and forecasted to grow at a 27% CAGR to $116B in 2024.

With a target of reaching $1B in revenue by 2024, and an acceleration in revenue growth consecutively since its IPO, with revenue increasing 37% y/y in 3Q21, and ARR increasing 36% y/y, the company should have no problem reaching this goal as long as growth sustains at these rates.

DigitalOcean says simplicity is a competitive advantage and differentiator, and while that certainly may be true, there is adequate room for evolving its cloud platform, products, as well as infrastructure to take advantage of the massive opportunity looming overhead, while staying true to that vision.

Additionally, DigitalOcean's cloud runs in a number of data centers across North America, Europe, and Asia Pacific, and most are premium-priced colocation data centers, such as Equinix, CoreSite, and Digital Realty. This presents an opportunity to create cost efficiencies and scale for future expansion if the company were to begin using larger wholesale providers, and segment out its network infrastructure to run in those facilities with high network density but with a smaller footprint, while deploying its cloud platform in cheaper wholesale facilities, which is a fairly common approach.

Let's take a further look at what opportunities may be in store in for the year across Market Expansion, Product, and Go To Market.

Market Expansion

Today, DigitalOcean's alternative cloud platform is in 8 markets across North America, Europe, and Asia Pacific including New York, San Francisco, Toronto, London, Amsterdam, Frankfurt, Singapore, and Bangalore.

Where to next?

DigitalOcean has talked about expanding to Brazil for almost a decade, when in 2013 its co-founder and then Chief Executive told TechCrunch that Brazil was the most requested location but the company had not yet made a decision. This is something that Yancey Spruill, current Chief Executive has also mentioned at investor events, saying:

We're looking to expand that into certain regions where we're not today, in Asia Pacific as well as South America, Africa. So we will look to globalize.

That also brings Africa and other markets in Asia Pacific into the conversation, which have also been mentioned previously at other events

Possible Markets

South America

Most Likely

  • Brazil

Less Likely

  • Chile
  • Colombia

Asia Pacific

Most Likely

  • Australia - Sydney/Melbourne
  • Japan - Tokyo/Osaka
  • India - Given India is one of the company's top regions, it could expand to another location in country, such as Mumbai or Delhi

Less Likely

  • Indonesia
  • South Korea
  • Hong Kong

Africa

Most Likely

  • South Africa

Less Likely

  • West Africa
  • East Africa

Europe
Expansion in Europe isn't likely given DigitalOcean is currently available in 3 markets, all within close proximity of each other.

Less Likely

  • Poland
  • Nordics
  • Spain
  • Italy
  • Ireland

What about further expansion in North America?

I believe having a broader reach in the region has its benefits, but where to go?

DigitalOcean is only on the West and East Coast, so if it wanted to add a new market, I'd think places like Dallas and Chicago would make sense. If the company looks to elevate its data center strategy, the opportunities could be broader and include other markets such as Northern Virginia, Salt Lake City, Reno/Las Vegas, or Portland.

What about edge computing?

DigitalOcean could also deploy smaller footprints in more locations, similar to some of the large public cloud providers who have done this for their primary regions, as well as AWS who is extending its reach into more markets with Local Zones.

Product

DigitalOcean's mission is to "simplify cloud computing so developers and businesses can spend more time creating software that changes the world", and they talk about this frequently. Essentially, this leaves a lot of opportunity for expanding its product line, and it's worth calling out two things from 2020; 1) 2021 acquisition of Nimbella, a serverless platform, and 2) the hiring of Gabe Monroy, as its first Chief Product Officer, each paving the road for more product development and innovation.

Thinking about its product and how it may evolve while aligning to its core mission of simplicity, they're a few things we might see from DigitalOcean in 2022.

Potential Product Releases

Compute
Today, there are five droplet (VM) plans: Shared CPU/Basic, Dedicated CPU/General Purpose, CPU-Optimized, Memory-Optimized, and Storage-Optimized.  

Additionally, there are multiple variations of each, based on different sized cpu/storage/data transfer.

Most Likely
- AI/ML GPU Droplets
- Windows OS Support

Less Likely
- Bare Metal

Network

Today, DigitalOcean's network offerings are basic and include Floating IP's, Load Balancers, Cloud Firewalls, IPv6 Support, and VPC.

Functionality and product's we could see added to the network product line, include:

  • Private Network Interconnect/Direct Connect product
  • VPC connectivity between regions
  • and more security-focused functionality

Marketplace/Other

The marketplace product is a must, giving customers the ability to find and easily deploy new applications, and DigitalOcean has consistently focused on improving and enhancing its marketplace and I'd expect this year to be no different. One area it could look to drive is networking as there are only a few network-based applications in the Marketplace. As the company builds up its networking capabilities, a plethora of integrations and applications to add are available in the market today.

Aside from that, I'd expect we see products and features continue to expand into regions they're not available in today as well as further innovation around it Serverless product.

Go To Market

DigitalOcean's Go to Market strategy has been primarily focused on self-service, targeted at developers and eventually including SMB. The company has a small direct salesforce today, responsible for 3% of revenue which is something like $12-15M for 2021. Additionally, the company spends 10% of revenue of sales & maketing today.

At an investor conference in December 2021, the company mentioned that they are adding outbound selling capabilities, had a new executive start in 4Q21, and that the market should expect to see that direct sales capability ramp to multiples of the 3% of revenue its at today.

Conclusion

Competition in cloud computing is intense, and with larger public cloud's light-years ahead, DigitalOcean and other "Alternative Cloud" providers such as Linode, Vultr, and OVH have been building up an in an exciting little market. As it strives to maintain a growth rate above 30%, broaden its product line and enter new markets, the future for DigitalOcean is bright and 2022 will be an interesting year as they turn 2 in the public equity markets.

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