DigitalOcean (NYSE:) is yet another smaller AI-focused company whose Q3 results prove the AI trade isn’t over, far from it.
The AI trade, as it relates to the DOCN stock price, is not only strong but also gaining momentum, signaling a shift in the tide for this mid-cap market. With shares near long-term lows in Q4, the upside potential is tremendous.
A move to new long-term highs would open the door to an additional 50% to 100% of upside, and even larger gains are likely to occur over the long term.
DigitalOcean’s AI Tidal Wave Is Here
Evidence of DigitalOcean’s AI-driven tidal wave arrived with the Q3 release. Demand for the company’s cloud, IaaS services drove revenue to $230 million, a 16% increase that outpaced the guidance by 150 basis points. The growth is small compared with other AI stories, but it reveals sequential and year-over-year (YOY) acceleration that was compounded by guidance and long-term targets.
Growth was underpinned by an increase in large clients, with those contributing more than $100,000 in run rate up by 41% and those contributing more than $1 million up by 72%.
The margin news is also robust. The company managed to control costs and received the benefits of its improved scale. The net result is that adjusted EBITDA grew in alignment with the top line while net income improved by 138%, cash flow by 42%, and free cash flow by 325%.
The $85 million in free cash flow is a 37% margin expected to remain strong in the upcoming quarter.
DigitalOcean’s Q4 guidance is wow-quality, aligning with other AI stories to date. The company issued better-than-expected Q4 guidance, underpinned by strong demand for AI, which lifted its full-year targets in the process. Momentum is expected to build in the subsequent year, resulting in 20% growth a full year ahead of schedule.
Based on the Q3 momentum and guidance, the 2026 outlook is likely to be cautious. The remaining performance obligation, a forward-looking measure, is up approximately 350% YOY, suggesting future growth will be much stronger.
DigitalOcean’s Shareholder Value Will Inflect Soon
DigitalOcean’s cash flow and free cash flow are significant because the company is profitable; more importantly, it has the capacity to improve its balance sheet. The year-to-date activity shows a reduction in cash; however, the remaining details offset it and more. Total assets increased, debt was reduced and repositioned, and leverage and liabilities were reduced.
The company continues to run a deficit, but at the Q3 pace of reduction, it will inflect to positive shareholder value as early as the current quarter. In this scenario, DigitalOcean’s share price has multiple tailwinds that could drive it higher in 2026.
The analysts’ response to the news highlights the significance of Digital Ocean’s accelerating business. MarketBeat tracked only two revisions within the first 24 hours of the release: a double upgrade from Underperform to Buy by Bank of America, which included an increased price target, and a price target increase from UBS.
The takeaway is that sentiment is firming, with a bullish bias to the Moderate Buy rating, and improving odds that the stock will move into the high end of the range, sufficient to set a new long-term high.
DigitalOcean Prices in AI Impact on Long-Term Outlook
DigitalOcean’s stock price surged 20% within days of the release as its market priced in the impact of AI. The move confirms strong support at the bottom of the existing trading range and sets the market up to retest critical resistance in 2025.
The critical resistance target is near the top of the trading range at $50; a move above that level will confirm a complete market reversal, signalling the onset of accumulation and a high potential for double-digit price gains within a few quarters.