QS Research · Michael Burry's Scion Capital analyst template · 2006
DigitalOcean Holdings, Inc. (DOCN)
As of 2026-11-11 · 12/15 boxes filled from SEC filings and market data
Report price $79.52 (close 2026-11-10)
Conclusion: WATCH
Conviction low · base case +28% · downside -25% · upside -30%
The market is paying 28.3x TTM EV/EBITDA and 8.99x EV/Sales for a business earning a 3.8% ROIC against a 12.3% WACC (N46, N47, N48), with GAAP operating income falling 27% to $33.0M in Q3 2026 as gross margin dropped to 50% from 60% (S29) while the 60%+ FY2027 growth guide is a rate with no dollar figure and no GAAP reconciliation (S31). The AI narrative is real (AI Customer ARR $376M, RPO $800M, S29/S31) but it is being bought with dilution (+29.0% net share issuance, N43; $111.3M SBC, 46% of FCF, N45) and $3.01B of off-balance-sheet commitments (N54). On the independent peer-median P/E of 21.1x the base case is $101.85 (+28.1%, N58); the downside case at 57.5x is $59.88 (-24.7%), and the lower case is $55.66 (-30.0%) (S1, N14, N23, N5). The call is watch with low conviction: the growth is funded and the returns are below cost of capital, but the base case is positive, so this is not a short.
Key numbers
- Share price: $79.52
- Market cap: $9.38B
- Latest financial period: TTM to Sep 30, 2026
- Revenue (TTM): $1.10B
- EV / EBITDA (TTM): 28.3x
- P/E (TTM): 273.9x
- FCF yield: 2.6%
- Price / book: 6.62x
- Earnings-quality flags (TTM): none flagged
- P/E, operating (tax-normalized) (TTM): 94.9x
- EV / FCF (TTM): 40.6x
- Revenue growth (latest fiscal year): +15.5%
- ROIC (TTM): 3.8%
- WACC: 12.3%
- Economic profit spread: -8.6 pts
The 15 boxes
- ✓ 1. Long-form business notes
DOCN's latest 10-K (dated 2026-02-24) frames it as an agentic inference cloud selling consumption-based IaaS, PaaS/SaaS and AI/ML through self-service plus sales and partnerships, with DNE customers (> $500/month) as the key cohort. The oldest FY2021 10-K framed it around developers, startups and SMBs, ~609,000 total customers and ARPU; the newest counts ~21,000 DNE customers at 12/31/2025, 60% of FY2025 revenue, and cites ARR of $970M. Revenue rose from $318.4M FY2020 to $901.4M FY2025 and $1.10B TTM to Sep 2026, while GAAP operating income was $157.0M FY2025 and $137.8M TTM.
- ✓ 2. Competitive advantage
DigitalOcean claims a differentiated position—simple, scalable and approachable cloud for growing technology companies—but the sources show no durable switching-cost moat and intense competition from AWS, Azure, GCP and others. Post-deal financials show scale and operating leverage: revenue was $901.4M in the year ended 2025-12-31 and $1.10B TTM to 2026-09-30, with operating income of $157.0M and $137.8M respectively. The weak point is lock-in: most contracts are terms of service with no committed period and customers can terminate or reduce usage without notice.
- ✓ 3. 10-Q takeaways
Q3 2026 (quarter ended September 30, 2026) revenue was $321.2 million, up 40% year over year, with ARR of $1,285 million and AI Customer ARR of $376 million, but gross margin fell to 50% from 60% as data-center expansion costs (depreciation, co-location) ran ahead of the revenue ramp. GAAP operating income fell to $33.0 million (10% margin) from $44.9 million (20%), and the GAAP result was a $42.6 million net loss attributable to common stockholders, driven mainly by a $57.1 million induced conversion expense on the 2030 Convertible Notes; adjusted EBITDA was $144 million at a 45% margin. Guidance was raised and is numeric: Q4 2026 revenue $348-351 million (+44-45%) and FY2026 revenue $1.208-1.211 billion (~34%), with 2027 revenue growth guided to 60%+.
- ✓ 4. Corporate governance
Filled; members read this box.
- ✓ 5. Overview of the prior 3 years of 8-K filings
Filled; members read this box.
- ✓ 6. Other significant filings
Filled; members read this box.
- ✓ 7. Chronology of significant news and events
Filled; members read this box.
- ✓ 8. Comparables valuation interpretation
Filled; members read this box.
- ✓ 9. Insider trading interpretation
Filled; members read this box.
- ○ 10. Earnings-call notes
- ○ 11. Impression of the shareholder letter
- ○ 12. Scuttlebutt overview
- ✓ 13. Valuation and risk/reward summary
Filled; members read this box.
- ✓ 14. Current price suppression and potential catalysts
Filled; members read this box.
- ✓ 15. Conclusions
The call above.
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