Independent Cloud Provider DigitalOcean Drops in Wall Street Debut

  • DigitalOcean raised $775 million in its initial public offering.
  • Unlike larger cloud rivals, the company hasn't built up a formidable collection of revenue from contracts to deliver future services.

Small-scale cloud infrastructure provider DigitalOcean debuted on the New York Stock Exchange on Wednesday, under the ticker symbol "DOCN."

The stock started trading at $41.50 per share, about 12% lower than the $47 price at which it sold shares in its initial public offering, and below the range of $44 to $47 per share the company had provided in updates to its IPO prospectus. At the end of Wednesday's trading session, shares had fallen almost 10% to $42.50, valuing the company at $4.48 billion.

DigitalOcean challenges much bigger companies, including Amazon and Microsoft, in the market to provide computing and storage resources that companies can consume to run their software, instead of operating their own data center infrastructure. DigitalOcean has built up a business by keeping its products easy to use. Most of its revenue come from the use of droplets, which are virtual slices of physical servers.

"We give every customer, regardless of size, a personalized support experience, so we think that making it easy and simple and giving our customers help when they need it is the way to earn every day our developers' and entrepreneurs' hearts and minds," CEO Yancey Spruill said on CNBC's "Squawk Alley." He said the market is large, with over $100 billion in annual cloud spending for small and medium-sized businesses.

The company sees an opportunity to add analytics software that would enable users to do more with data stored in databases, and it intends to add data center infrastructure in more places around the world, Spruill told CNBC later on Wednesday.

DigitalOcean raised $775 million in the IPO. The company operates 14 data centers of its own in the U.S. and abroad through leases, and the company intends to continue expanding its footprint, like its competitors. But unlike its large rivals, DigitalOcean doesn't have billions of dollars that customers have agreed to pay for services they have not used yet. The company had less than $5 million in deferred revenue at the end of 2020.

In 2020 DigitalOcean registered a $43.6 million net loss on a total of $318.4 million in revenue. The loss was up 7% from 2019, and revenue grew by about 25%. In a presentation to prospective investors, finance chief Bill Sorenson said the company wants to increase the amount of money it derives from each customer while reducing research and development and general administrative costs as a percentage of revenue.

"We still see a pathway to continuing to increase our overall operating margins in a number of the spend areas," Sorenson said on Wednesday.

At its $47 IPO price, DigitalOcean was valued at a price-to-sales multiple of 16 based on 2020 revenue, compared with 12 for Microsoft.

-- CNBC's Ari Levy contributed to this report.

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