$2.35
$10.20
bear $2.35
base $6.80
bull $10.20
margin of safety $3.40
market price* $98.69
DigitalOcean rents cloud computing to developers, startups and small and mid-sized software companies: virtual servers (Droplets), managed databases and Kubernetes, and a growing line of AI services (GPU servers and the Gradient AI platform). Customers pay monthly for what they use, with no long-term contracts, so revenue depends on customers continuing to build on the platform. Revenue was $901 million in 2025, up 15%, and $281 million in the second quarter of 2026, up about 29% on a year earlier. The top 25 customers were only 10% of 2025 revenue. How we measure earnings. We start from cash generated by operations ($310 million in 2025), remove working-capital swings, and deduct stock compensation ($80 million) and the equipment spending needed to keep the business running. Reported 2025 net income of $259 million is not a guide: it includes a $48 million non-cash gain from buying back convertible notes below face value and a $70 million one-time tax benefit. One important point: in 2025 the company bought about $127 million of servers through equipment financing rather than paying cash, so those purchases do not show up in ordinary capital spending. We count them as spending, because the equipment is real and must be paid for. On this basis, owner earnings per share were about $0.98 in 2023, $0.62 in 2024 and $0.53 in 2025. Cash flow from operations keeps growing, but heavy data-center and server spending absorbs most of it. Starting point. We use about $0.50 per share, based on the 2023 to 2025 record (median about $0.62) adjusted for the larger share count. Diluted shares were 105 million in 2025 and about 127 million in the second quarter of 2026, as convertible notes now count toward dilution. Earlier years were a smaller, less profitable business with much higher stock compensation and are not used. In 2025, owner earnings fell about 16% per share; for year 1 we assume no growth rather than a recovery, because the drop reflects the one-off financed server purchases while operating cash flow rose 9.5%. Note that operating cash flow in the first half of 2026 was flat versus the first half of 2025 ($157 million) despite much higher revenue, because data-center costs and stock compensation rose, and we do not credit an improvement from that. Base case: about $6.80 per share. Owner earnings hold at $0.50 in year 1, then grow 3% a year through year 10, well below the 13% to 20% annual revenue growth of the last three years. The credit is limited to what the business has demonstrated: customer spending has expanded steadily, with revenue from established digital-native customers up 24% in 2025. We then hold earnings flat for ten more years, and assume nothing after year 20. We give no credit to AI demand growing, new products, or margin gains, none of which is yet visible in owner earnings. Bear case: about $2.35 per share. The company carries about $1.3 billion of convertible notes and term loan (before a further $120 million borrowed in February 2026), and $312 million of 2026 convertible notes fall due within a year, which management plans to settle mainly with its credit facility. In this case, higher interest cost and continued heavy server spending hold owner earnings at $0.25 a year for ten years, and then competition from much larger cloud providers erodes them to zero over the following ten. About $599 million of new data-center leases were scheduled to start between January and April 2026, adding fixed costs. Bull case: about $10.20 per share. The new data-center capacity comes online as scheduled, and owner earnings start at $0.55 and grow 8% a year for nine years, still well under recent revenue growth, as spending on servers stops absorbing nearly all the added cash flow. They then stay flat for ten more years. This rests on facts already in the filings: the largest-spending customer group (Scalers+) grew from 18% to 26% of revenue between 2023 and 2025, and second-quarter 2026 revenue grew about 29%. What would make this estimate wrong. If server spending stays near 30% of revenue and financing continues to fund it, owner earnings could stay near zero even as revenue grows. If the AI services turn out to earn attractive returns, the bull case is the more likely path. We could not separate how much of the recent server spending was growth versus maintenance, so we applied the company's own long-run spending-to-revenue ratio (about 25%) to estimate the growth portion. No allowance was made for interest on the convertible notes beyond what is already in operating cash flow. Margin-of-safety price: $3.40, about half of the base case, reflecting a leveraged, capital-hungry business with usage-based revenue and no contracts, and a bear case around $2.35.