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DigitalOcean vs Cloudflare — which stock can take advantage of cloud expansion?

DigitalOcean Holdings [DOCN] and Cloudflare [NET] are two companies in the expansive world of cloud computing. But, while DigitalOcean is a cloud platform for developers, startups and small and mid-sized businesses (SMBs), Cloudflare provides website security and content delivery services.

With many cloud computing options out there we wondered which of these two exciting companies is the better investment: DigitalOcean Holdings or Cloudflare?

This article was originally written by MyWallSt. Read more insights from the MyWallSt team here.

DigitalOcean Holdings: the bull and bear case

DigitalOcean is a cloud computing platform company that is currently attracting attention from investors as a potential buy right now.

It posted a promising report for its Q4 earnings this year with revenue up 37% year-over-year (YoY) to $119.7m. Additionally, the company increased its total customers to 609,000, and the average revenue per user (ARPU) was $65.87, a 29% YoY increase.

For Q1 2022, DigitalOcean hopes to bring in revenue of $126–$126.5m, and the full-year outlook for revenue expectations now sits between $564–$568m.

On the flip side, DigitalOcean is barely a profitable business. Its latest adjusted earnings per share (EPS) came in at $0.10. However, expectations are that this cloud platform company will begin to make a profit moving forward, with EPS for the full year expected to fall between $0.70 and $0.71 per share.

DigitalOcean may be a very exciting company in the world of cloud computing, but it has to compete with huge players such as Amazon [AMZN], Salesforce [CRM] and Google [GOOGL]. However, with lower prices than major competitors, DigitalOcean should be able to build up its market share as it grows.

Cloudflare: the bull and bear case

Cloudflare is a popular cloud computing stock with huge potential. It gives clients the web infrastructure and website security that facilitate content delivery networks and distributed denial of service (DDoS) mitigation.

Delving into its financials, the company posted a solid Q4 2021 report with revenue coming in just above expectations at $193.6m, a 54% increase YoY. This was primarily driven by record dollar-based net retention of 125%, the improvements owing to continued business from large enterprise customers.

Cloudflare has also launched Project Pangea, a project that aims to boost worldwide internet around the globe; Oahu, a programme that allows migration from older legacy systems; and Early Hints, which increases internet speed by 30% for businesses.

However, Cloudflare faces heavy competition from the likes of Fastly [FSLY], Amazon and Microsoft [MSFT]. The company is certainly growing and as such its share price is also likely to continue to do so. However, with pandemic headwinds still causing uncertainty, if market volatility continues, Cloudflare could continue to suffer.

So, which should I buy?

Cloudflare is less risky, and the better investment of the two. With its continued large client growth and the potential for expansion into SMBs from underdeveloped areas, Cloudflare has a very big runway for business growth in the long term.

DigitalOcean Holdings is riskier, although not by much. It has met expectations of breaking even by 2022, and it already has a good hold in the SMB market. It now needs to focus on establishing a larger customer base before it can diversify its selling strategy.

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