AI Panic Is Crushing Software Stocks — But DigitalOcean May Be the Hidden Winner of the AI Boom

DigitalOcean just delivered one of its strongest quarters in years — yet the stock has fallen from $68 to $58 in the past week as investors panic over AI’s impact on software. That disconnect may be creating an opportunity.

At a time when markets are lumping all “software” names together under the AI disruption umbrella, DigitalOcean is being misunderstood. It is not a traditional SaaS vendor vulnerable to AI automation. It is infrastructure — and AI cannot run without infrastructure.

DigitalOcean operates a cloud computing platform that provides developers and businesses with servers, storage, networking, and GPU capacity to build and deploy applications. Instead of offering thousands of complex services like hyperscalers, DigitalOcean focuses on simplicity, cost efficiency, and predictable pricing — a model that resonates with startups, AI-native companies, and smaller engineering teams.

In fact, the AI shift may be one of the most powerful tailwinds the company has ever seen.

Fourth-quarter results underscored that momentum. Revenue grew 18% year over year to $242.4 million, beating expectations of roughly $237.7 million. Adjusted EPS came in at $0.44 versus estimates of $0.38. Gross profit reached $142 million with a 59% margin, while adjusted EBITDA was $99 million, representing a strong 41% margin.

Annual run-rate revenue ended the quarter at $970 million, up 18% year over year. Net dollar retention improved to 101% from 99% a year ago, signaling stabilization and reacceleration in expansion dynamics. Remaining performance obligation (RPO) surged to $134 million from just $22 million a year ago — with $73 million expected to convert into revenue over the next 12 months — providing visible forward demand.

The customer mix tells an even more compelling story. Customers generating over $100,000 in ARR grew 26%, and revenue from that cohort increased 58%. The $500K+ and $1M+ customer segments grew 51% and 71%, respectively, with revenue from $1M+ customers jumping 123% year over year. Million-dollar ARR now totals $133 million.

AI is driving much of that growth. The company reported $120 million in AI customer ARR, up 150% year over year. Importantly, more than 70% of AI-related ARR comes from inference services and core cloud products — not bare metal GPU rentals — meaning DigitalOcean is monetizing production workloads, not just hardware demand.

CEO Paddy Srinivasan framed it clearly: “AI is reshaping entire industries, and we are built for this shift.” The company’s Agentic Inference Cloud and Gradient AI platform are designed to support real AI deployment, not speculative experimentation.

This distinction matters.

AI coding assistants like Claude or ChatGPT do not eliminate infrastructure needs. They accelerate development, which in turn increases experimentation, prototyping, and deployment. All of that code still has to run somewhere. AI lowers the barrier to entry for developers and startups — the exact audience DigitalOcean serves.

Smaller AI-native companies, often with lean teams, need simple, cost-effective cloud infrastructure. They do not want to navigate hyperscaler complexity or commit to enormous enterprise contracts. DigitalOcean sits in that sweet spot.

The market’s recent selloff appears to conflate infrastructure risk with application-layer disruption. Software companies selling workflow automation may face margin compression from AI-native competitors. Infrastructure providers supplying compute and inference capacity are not being displaced — they are enabling the shift.

Guidance reinforces that this is not a slowing business. For full-year 2026, DigitalOcean expects revenue between $1.075 billion and $1.105 billion, above consensus at the midpoint. Adjusted EBITDA margins are projected at 36% to 38%, and adjusted free cash flow margins at 15% to 17%.

Management went further, raising longer-term growth expectations. The company now expects 21% growth in 2026, exiting the year at 25%+ growth and targeting 30% growth in 2027 — all while remaining profitable. Management believes it is on track to become a weighted Rule of 50 company by 2027.

That is not the profile of a business being disrupted.

Yes, 2026 EPS guidance of $0.75 to $1.00 came in below consensus expectations, and free cash flow margins are compressing modestly as the company invests in AI capacity. Operating cash flow margin fell to 24% from 35% a year ago, and adjusted free cash flow margin declined to 11% in the quarter.

But those investments are intentional and growth-oriented, not reactive.

Valuation further strengthens the case. Even after its rally earlier this year, DOCN trades at a discount to higher-growth cloud peers on both P/E and EV/sales multiples. Analysts at Canaccord and Cantor have raised price targets, citing accelerating ARR, expanding GPU-led platform capabilities, and improving net-new organic growth. Some now see the business accelerating revenue growth four consecutive years.

The stock’s pullback from $68 to $58 reflects macro-driven AI fears, not company-specific deterioration. Markets are currently operating on narrative rather than differentiation. When sentiment dominates fundamentals, volatility follows.

Could the stock see further downside if AI anxiety intensifies? Absolutely. In irrational environments, good companies can fall alongside weaker ones. But long-term investors should focus on the structural positioning.

AI cannot function without compute infrastructure. AI-assisted development increases the number of applications being built. Smaller teams empowered by AI tools need cost-efficient infrastructure. DigitalOcean is purpose-built for that environment.

This is not a company being eaten by AI. It is a company supplying the fuel.

With accelerating ARR, improving enterprise mix, 40%+ EBITDA margins, expanding RPO, and raised multi-year growth targets, DigitalOcean’s fundamentals remain intact. The market may be nervous, but the business trajectory suggests the selloff is sentiment-driven.

For investors willing to look past short-term volatility, DOCN increasingly resembles a classic “buy the dip” name positioned squarely at the center of the AI infrastructure expansion.