Morgan Stanley just reset its expectations for DigitalOcean (DOCN). The firm maintained its $75 price target but also laid out a bull case for the stock to reach $160 if execution continues to improve.
Shares trade around $96 after climbing 100% year to date, adding more weight to what comes next. The company’s upcoming Q1 earnings report on May 5 stands as a potential catalyst for the stock, with investors looking for proof that AI momentum, improving customer quality, and new capacity investments can keep pushing the business forward.
AI mix shift turns DigitalOcean into a real platform story
DigitalOcean’s latest earnings update changed the AI narrative in a meaningful way. AI customer ARR reached $120 million, up 150% year over year, and more than 70% now comes from inference and core cloud products instead of basic GPU rentals.
This increase in inference revenue shows that customers are actually using AI in live products, not just testing or training models, because inference happens every time an app generates a response, processes data, or serves a user with AI.
This type of usage is ongoing and tied directly to production demand. As customers move into production, they also rely on compute, storage, and networking to support their applications, allowing DigitalOcean to earn more revenue per customer.
Management believes inference-heavy demand is more durable, and the next proof point is execution. Beating the $249 million to $250 million Q1 guide and raising the $1.105 billion FY2026 outlook without weakening retention would show that AI is strengthening the core business.
That is the heart of Morgan Stanley’s view that DigitalOcean is a differentiated “neocloud,” MarketBeat reports. The upside rests on using AI to pull customers into a broader cloud stack and raise revenue per customer across the platform. Unlike providers built primarily around bare-metal GPU rental, DigitalOcean pairs an established SMB- and startup-focused cloud platform with an AI offering aimed at agentic and inference workloads.
That positioning keeps the company out of the most capital-intensive part of the market, where hyperscalers and specialized GPU providers hold structural advantages. Instead, it competes where ease of use, bundled services, and existing customer relationships matter more.
Retention and upmarket gains are improving revenue quality
The core cloud business is also moving in the right direction. Net dollar retention improved to 101%, putting DigitalOcean back into expansion territory where existing customers are growing fast enough to offset churn.
That shift matters because a shrinking base is hard to build on. With retention back above 100%, the company has a more stable foundation on which to layer growth.
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The mix of customers is improving as well. Revenue from customers generating more than $1 million annually jumped 123% year over year, showing the upmarket push is landing larger, more valuable accounts.
This changes how investors should view the business. A higher concentration of larger customers tends to improve predictability, increase lifetime value, and make future growth easier to underwrite.
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DigitalOcean’s capacity spending raises stakes for 2027
DigitalOcean is entering a more capital-intensive phase and is accepting lower near-term profitability to expand infrastructure.
The company guided for FY2026 adjusted EBITDA margins of 36% to 38%, down from 42% in FY2025, while planning to increase capacity from about 45 megawatts to 76 megawatts by the end of 2026.
DigitalOcean is pulling forward costs now to support future demand. If the new capacity comes online on time and fills with higher-value AI and cloud workloads, the margin dip sets up stronger 2027 earnings power.
The financing adds another layer of pressure. Management tied the reported $889 million equity raise confirmed on March 25 to the expansion plan, but that increases the return hurdle. Future earnings now have to offset both margin compression and dilution.
What could push DOCN higher
- AI revenue shifts toward inference and bundled cloud services, improving mix and making growth more durable.
- Customers adopt compute, storage, and networking together, driving higher revenue per account and better unit economics.
- Net retention stays above 100%, allowing existing customers to power growth without heavy reliance on new logos.
- Upmarket expansion continues, adding larger customers and improving revenue durability and valuation support.
What could pressure DOCN shares
- Capacity ramps slower than expected, pressuring margins before incremental revenue materializes.
- Equity-funded expansion delivers weak returns, making dilution harder for investors to accept.
- AI demand shifts back toward short-term GPU rental, reducing visibility, and weakening revenue quality.
- Upmarket momentum slows, weakening the multiple expansion case and overall growth narrative.
Key takeaways for DigitalOcean
DigitalOcean is strengthening its business with a better AI mix, higher retention, and a growing base of larger customers. These trends increase revenue per customer and support more durable growth across the platform.
Future returns will depend on execution. The company is investing heavily in capacity, and that investment needs to translate into higher utilization and stronger earnings power. If management delivers, the gap between the current valuation and the $160 bull case could narrow.
Related: Analysts reset ServiceNow stock price target after earnings
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