A month has gone by since the last earnings report for DigitalOcean Holdings, Inc. (DOCN Quick QuoteDOCN - Free Report) . Shares have lost about 15.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is DigitalOcean due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the latest earnings report in order to get a better handle on the important drivers.

DOCN Q2 Earnings Beat Estimates on AI Growth, Strong Margins

DigitalOcean posted second quarter 2026 non-GAAP earnings of 45 cents per share, which fell 23.7% year over year but topped the Zacks Consensus Estimate by 73.08%.

Revenues increased 28.6% year over year to $281.18 million and beat the consensus mark by 1.23%. Annual Run-Rate Revenue (ARR) reached $1.125 billion, up 29%, while AI Customer ARR jumped 212% to $234 million.

DOCN's Large-Customer Cohorts Fueled Growth

Growth was led by higher-spending customers. ARR from $1 million-plus customers reached $259 million, up 214% year over year and accounted for 23% of total ARR. ARR from $500,000-plus customers rose 160% to $291 million, while the $100,000-plus cohort increased 98% to $395 million.

The expansion also strengthened contracted visibility. Remaining performance obligations climbed to $894 million from $71 million a year earlier, with $366 million expected to be recognized over the next 12 months. DigitalOcean also signed its first nine-figure annual customer commitments, extending weighted average contract life from 1.6 years to more than three years.

DigitalOcean's AI-Native Cloud Gained Traction

Inference services grew 762% year over year, while 85% of AI customer ARR came from inference services and core cloud rather than bare metal. The Inference Engine attracted more than 6,000 customers after its late-April launch, and token volume increased roughly 30-fold over the prior 60 days.

Product expansion supported that adoption. DOCN shipped more than 80 releases across its five-layer AI-Native Cloud since April. Roughly 70% of AI customers with at least $100,000 in ARR attached a core cloud product, indicating broader use of compute, storage, databases and orchestration alongside AI workloads.

DOCN's Higher Costs Compressed GAAP Margins

Gross profit increased to $154.66 million from $130.95 million, but gross margin declined to 55.0% from 59.9%. 

Total operating expenses rose to $125.29 million from $95.33 million. Research and development expense climbed to $57.5 million from $39.6 million, while sales and marketing rose to $22.6 million from $19.3 million. General and administrative expense increased to $45.2 million from $36.4 million.

Adjusted EBITDA increased 26.9% to $113.56 million, while the margin edged down to 40% from 41%.

GAAP operating income fell 17.5% to $29.37 million, with operating margin contracting to 10% from 16%. Adjusted operating income rose 9.3% to $67.48 million, though its margin declined to 24% from 28%.

DigitalOcean's Cash Flow Supported Capacity Build

As of June 2026, cash and cash equivalents totaled $767.03 million compared with $741.5 million as of March 31, 2026.

Net cash provided by operating activities rose 19.0% to $109.97 million, while the operating cash flow margin declined to 39% from 42%. Adjusted free cash flow increased 6.3% to $60.59 million, with the corresponding margin narrowing to 22% from 26%.

DOCN Raised Its 2026 Outlook

For the third quarter of 2026, DigitalOcean expects revenues of $304 million-$307 million, representing 32%-34% growth. Adjusted EBITDA margin is projected to be 38%-39%, while non-GAAP earnings are expected to be between 28 cents and 30 cents per share.

For 2026, DOCN raised revenue guidance to $1.170 billion-$1.180 billion from $1.130 billion-$1.145 billion. The company now expects 30%-31% revenue growth, a 38.5%-39.5% adjusted EBITDA margin, an 11%-13% adjusted free cash flow margin and non-GAAP earnings of $1.35-$1.40 per share. Management also expects revenue growth of at least 35% by the fourth quarter and reiterated confidence in more than 50% growth in 2027.

How Have Estimates Been Moving Since Then?

Since the earnings release, investors have witnessed a upward trend in estimates revision.

VGM Scores

Currently, DigitalOcean has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for value investors.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, DigitalOcean has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

DigitalOcean belongs to the Zacks Internet - Software industry. Another stock from the same industry, Reddit Inc. (RDDT Quick QuoteRDDT - Free Report) , has gained 1.8% over the past month. More than a month has passed since the company reported results for the quarter ended June 2026.

Reddit Inc. reported revenues of $804.91 million in the last reported quarter, representing a year-over-year change of +61.1%. EPS of $1.25 for the same period compares with $0.45 a year ago.

Reddit Inc. is expected to post earnings of $1.33 per share for the current quarter, representing a year-over-year change of +66.3%. Over the last 30 days, the Zacks Consensus Estimate has changed +1.7%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Reddit Inc.. Also, the stock has a VGM Score of B.