DOCN is upgraded to buy: revenue growth is accelerating (35% in Q4 2026, at least 50% in 2027), but margins are shrinking as it invests in capacity, which is why the stock fell from around $180 to around $102. At a 55 forward P/E, a $122 DCF value implies roughly 20% upside over 12 to 18 months.

Digital Ocean expects revenue growth of 35% in the upcoming fourth quarter of 2026. This represents an increase from 28% in its last completed quarter.

Furthermore, the management team anticipates revenue growth of at least 50% in 2027. So, with this kind of accelerated revenue growth, why is Digital Ocean's stock price declining?

Well, the reason is that the management team has stated that revenue growth will come at the expense of operating profit margins, as they invest to take advantage of their enormous growth opportunities.

So, investors are asking me if this price drop, coupled with accelerating revenue growth, represents a buying opportunity for this company.

I want to answer this question by looking at these recent developments, comparing them to their long-term performance, and balancing them with new and updated valuation calculations to determine if it is a genuine buying opportunity now.

In the long run, Digital Ocean has been steadily expanding its revenues. Revenues have increased from around 300 million in 2021 to one billion over the past 12 months.

With the recent acceleration, you can see the slope of the revenue growth curve is upward. The spread of proxy AI was positive for Digital Ocean, and the shift to open-weight models versus closed-weight models was also positive.

Instead of maximizing tokens, the company believes its customers maximize value by moving to openweight models at a lower cost.

But they need to invest in that additional capacity to meet this increasing rise in customer demand. This causes their profit margins to shrink. One of these margins that is shrinking is the cash flow ratio from operations, which was 31% over the past 12 months.

You can see that this metric was on a steady rise from approximately 2021 to 2025, increasing from 15% to 39%. Investors like to see revenue growth accelerate along with expanding margins.

This is the strongest evidence of organic demand for the company's products and services.

But when revenue growth accelerates while profit margins shrink, investors view it with greater skepticism. They believe that new investment is driving growth, rather than organic demand for the company's products and services being the engine of that growth.

Therefore, this reduces the strength of the proof of accelerated revenue growth. The margin effect is the main reason Digital Ocean's stock has lost momentum here in 2026.

Year to date, the stock is still up more than 111%, but it has dropped from around $180 per share earlier this year to around $102 per share at the time of this video.

One of the things I like about Digital Ocean is that the ratio of research and development expenses to revenue decreases as the company expands its revenue. It is true that there has been a slight increase recently as a result of their investing more to seize growth opportunities, but at 18.7%, this percentage remains much lower than the 29% that this indicator recorded in 2022.

Digital Ocean can increase its research and development budget, and I hope it does so; Because every company needs this fundamentally to expand its opportunities and innovate to offer new products and services.

But as their revenues grow, I would like to see their research and development expenditures grow at a lower percentage than their revenue growth rate. As their revenue growth rate accelerates, they will be able to expand their research and development budget while keeping it as a lower percentage of revenue, which will lead to increased overall profitability.

This ratio is relatively high compared to larger companies, whose R&D to revenue ratio is usually less than 10%, and often less than 7%. As the company's share price fell, its valuation multiple also fell.

Based on the forward price-to-earnings ratio, the stock is now trading at 55, which I find relatively attractive given their forecast of 50% revenue growth, and the operating cash flow to sales ratio, while not expanding, is still relatively strong at over 30%.

This means they are generating positive operating cash flow, which they can use to repurchase shares, or to pay off some of their existing obligations, such as convertible debt issues, and others.

This gives the company greater flexibility and reduces the risk of diluting shareholder stakes.

Today, I also updated my assessment of Digital Ocean using the discounted cash flow method. I now calculate the value of this business at $122 per share, compared to the current market price of approximately $102.

This leaves an opportunity for an increase of approximately 20% over the next 12 to 18 months.

I last evaluated the company on May 13, noting that the valuation seemed too expensive to buy at that moment. But today, I will upgrade Digital Ocean's stock rating to "buy". I believe the rating is now attractive enough to justify this upgrade.