DigitalOcean (DOCN) – The Shopify of Cloud Computing $200 Price Target Citron – Learning from Our Mistakes One of the greatest blunders we have made over the past 20 years of publishing Citron Research, is not realizing the power of Shopify when the stock was $100. At the time it seemed like another overpriced software company that allowed people to perform the simplest of tasks… making websites. What we failed to recognize and attribute enough value to was that: 1. Customers LOVED the product 2. The Small and Medium Sized Business (SMB) market was a lot larger than we anticipated and could work through its own churn 3. The power of a passionate and dedicated developer network 4. The ease of cross selling once a large customer base was established Congratulations to everyone who owned Shopify through the years. Citron has been waiting patiently for another company to come along with the same profile, hoping with fingers crossed that valuation would be investible… and it has finally come to market. Enter DigitalOcean – The Shopify of Cloud Computing DigitalOcean (DOCN) is a cloud computing platform purpose-built for SMBs (i.e., the Shopify of cloud computing or AWS for SMBs) at a fraction of the cost of large cloud providers. The transformation to the cloud for large enterprises is obviously already on its way. Just look at Amazon with Wall Street analysts estimating the value of AWS at $700-800 billion. The next wave is the SMB transformation to the cloud and multi cloud. We’ve seen this movie before and just like how Shopify and Square saw that SMBs were not far behind large enterprises in adopting ecommerce and digital payments, DigitalOcean is in the leading position to capitalize on this mega trend. Keep It Simple Stupid “Simplicity is the ultimate sophistication. It takes a lot of hard work to make something simple, to truly understand the underlying challenges and come up with elegant solutions.” – Steve Jobs Simplicity has become the key to winning in the SMB market. While AWS sells a product that is not just expensive but also very difficult to use, DigitalOcean, like Shopify has created an easy solution for SMBs to embrace cloud technology. Compare Shopify 2015 IPO Roadshow Presentation to DOCN Today: Shopify 2015 IPO Roadshow Presentation DigitalOcean Q1 2021 Earnings Presentation https://s27.q4cdn.com/572064924/files/doc_downloads/shopify_overview_nov.pdf https://s27.q4cdn.com/619704647/files/doc_financials/2021/q1/Q1-21-DOCN-Earnings-Presentation.VF.pdf Citron would argue that the SMB customer for DOCN is stickier than SHOP because a startup that needs cloud is more advanced than a drop shipper or small entrepreneur. ***It is SO OBVIOUS to Citron what is about to happen to DOCN stock. Look at the above chart at the growth of PaaS. As stated by management in last earnings call: “Roughly 90% of our revenue comes from the core compute network and storage solutions that are typically called Infrastructure as a service. 10% are Kubernetes, our Database as a Service. And that piece of the revenue pie is growing significantly higher than our overall growth rate. And that reflects that fact we have a growing customer who is building off their business” https://seekingalpha.com/article/4426204-digitalocean-holdings-inc-docn-ceo-yancey-spruill-on-q1-2021-results-e arnings-call-transcript The PaaS part of the DigitalOcean business is the high margin and high growth part of the business that will make DOCN the real AWS for SMBs. The Shopify of Cloud Computing (i.e., AWS for SMBs) When Citron initially published on Shopify, we were most surprised not by the enthusiasm of the shareholders, but rather the passion of the end users. Who gets so passionate over software??? After speaking with former employees, customers, and even the competition, we have found that DigitalOcean’s customer base is even more passionate and evangelical than that of Shopify, which leads us to believe that DigitalOcean will become the dominant SMB cloud provider. We were given the analogy during our calls with industry experts that using AWS is like operating a Boeing 747 (i.e., too many functions/switches/controls) while using DigitalOcean is like driving a car (i.e., relatively idiot-proof). A customer who spends $500K annually with DigitalOcean told us that DigitalOcean is his biggest cloud provider spend by far as it’s the easiest to use and on average is half the cost of the big cloud providers for the same service. We see a similar sentiment from DigitalOcean customer Parabol who moved over from Amazon’s AWS: “The hosting option became DigitalOcean simply because the product was so easy and friendly to manage – all at the right price” https://www.digitalocean.com/customers/parabol/ Below are some of the DigitalOcean’s positive customer testimonials: ● "What we really like about DigitalOcean is the keen customer focus. As a company that serves developers, we want a partner that understands our customers and has a shared purpose. DigitalOcean not only provides world-class infrastructure but they truly get developers. This makes our job easier in terms of building management services for them.” - Roxana Ciobanu, CTO of BunnyShell ● “With DigitalOcean, we get a low-cost option with great support and reliability.” - Director of Education & Awareness, Molly Wojcik ● “We had been growing 10 to 20% a month. And every step of the way, DO had tools that were exactly what it was right. We came for the simplicity and then, as we scaled, we were actually very pleasantly surprised by many things on the platform” - Daniel Ni, CEO & Founder of Scraper API ● “As a founder, I didn’t want to spend time micromanaging infrastructure and doing XML sit-ups. When the pandemic happened and traffic grew tenfold, the robust DigitalOcean platform allowed us to scale seamlessly, without any disruption to our operations, so we could continue to focus on running our business.” - Jordan Husney, Cofounder & CEO of Parabol Positive feedback from the developer community on DigitalOcean can also be found on YCombinator News: ● "I use DO because it's simple and easy. I got tired of dealing with AWS corporate-sized crap, all I want is to spin up several servers using terraform and get work done" ● "The company I work for solely uses DO. It has all the things you might want that won't get you cloud vendor locked. Plus their UI is actually useable, unlike my experience with AWS" ● "This. DO, imo, crushes AWS's pricing, documentation and ease of use for anyone but big enterprises" ● "AWS you need a math degree to understand the billing and even then you will never know exactly what you will be billed until you are actually billed... This is not the case with DO and Linode" ● "On AWS and others: spin up a server that costs more in comparision to Digitalocean, and prepare to find costs on your bill you never thought you would have: traffic, permanent storage, logging,..." https://www.digitalocean.com/blog/building-a-developer-tools-business-on-a-developer-focused-cloud/ https://news.ycombinator.com/item?id=26262830 https://www.g2.com/products/digitalocean-droplets/reviews The enthusiasm for DigitalOcean’s product has become almost cult like in the developer community… something that we always want to invest in regardless of valuation. Putting the Passion of DigitalOcean’s Customer in Perspective DigitalOcean has been able to only spend 10% of revenue on sales and marketing yet is able to deliver consistent 30% top-line growth (i.e., customer acquisition is very cost effective). As noted in the company’s S-1: “Our developer-centric approach has helped us foster a large and loyal following. We attract approximately 5 million monthly unique visitors to our websites, host what we believe is the largest hackathon in the world, and offer a comprehensive library of high-quality technical tutorials and community-generated questions and answers. Developers and SMBs especially value open source technology as it allows them greater choice, affordability and flexibility, and our platform is designed to take advantage of open source technology to provide our customers with a much more efficient way to work. Our participation in and support of the open source community further enhance the attractiveness, depth and scalability of our offering.” https://www.sec.gov/Archives/edgar/data/1582961/000119312521055798/d898181ds1.htm Comparatively, when Shopify was doing an equal level of revenue in 2016, the company was spending 33% of revenue on sales and marketing. Given that DigitalOcean already has a great product and has not done much beyond Google ads and a $100 credit to sign up new customers, using the IPO proceeds to implement a proper go to market strategy could drive a massive acceleration in revenue. With almost 600K SMB cloud customers and no real dollars spent on sales and marketing, it is going to be really hard to screw this one up…. and they are not. Ability to Move Up Market (Multi-Cloud) Beyond the growing SMB market, DigitalOcean might have an easier time than most in moving up market and taking some low hanging fruit from AWS and Azure. It’s no secret that cloud computing pricing has become a hot topic recently. Cloudflare CEO Matthew Prince has publicly blasted AWS that “their markups are bonkers” and that AWS keeps prices “artificially high”. For example, here is a Twitter post from last week. Note that Magesh Ravi is a Senior IT Recruiter at Cognizant, a $37 billion IT consulting firm. https://twitter.com/mageshravi/status/1419211615107305473 https://www.linkedin.com/in/magesh-ravi-a064539b https://www.businessinsider.com/cloudflare-ceo-matthew-prince-blog-amazon-cloud-aws-2021-7 https://www.cnbc.com/video/2021/07/27/cloudflare-ceo-on-why-hes-calling-out-amazons-pricing.html Not surprisingly, we are seeing an increasing number of companies adopt a multi-cloud strategy.