DigitalOcean Reports Strong Q4 but Faces Persistent Financial and Operational Headwinds

What happened

DigitalOcean announced robust fourth-quarter and full-year 2025 financial results, citing strong performance from its Agentic Inference Cloud and increased traction with large AI-native customers. The company raised its outlook for 2026 and 2027, expressing confidence in sustained AI-driven growth as industries shift towards AI. However, SEC filings reveal underlying challenges, including net dollar retention stabilizing at only 99% and net debt to EBITDA at a high 5.3x, indicating limited customer expansion and significant financial leverage. Fixed lease commitments and rising capital intensity for AI infrastructure add operational rigidity, which could compress margins if demand underperforms. This contrast between optimistic guidance and structural vulnerabilities suggests that while the AI narrative is advancing, it may not justify the current valuation without tangible improvements in retention and debt management.

Implication

DigitalOcean's strong Q4 and raised guidance may boost short-term sentiment, but the core risks of high leverage and sub-100% net dollar retention remain unaddressed. The company's aggressive AI expansion requires successful utilization of new capacity to avoid margin pressure from fixed costs, especially with competitive threats from hyperscalers. At current valuations near 23x P/E and 30x EV/EBITDA, the stock prices in optimistic growth scenarios, leaving little margin for error and increasing downside potential if targets are missed. Existing holders might maintain positions given the momentum, but new buyers should await evidence of sustainable NDR improvement above 100% and debt reduction before considering entry. Key monitoring points include upcoming reports on AI revenue growth, EBITDA margins, and leverage covenant adherence to validate the raised outlook.

Thesis delta

The announcement does not shift the fundamental thesis, as the positive performance aligns with base-case assumptions but fails to resolve the high leverage and retention issues highlighted in the DeepValue report. Investors should maintain a 'POTENTIAL SELL' rating until there is clear evidence of net dollar retention exceeding 100% and leverage declining below 3x, as any disappointment in growth or margins could trigger significant downside from current levels.