DigitalOcean's Big Move: Acquiring Paperspace for $111M in AI Cloud Computing

0:00What can 160 years of experience teach you about the future? When it comes to protecting what matters, Pacific Life provides life insurance, retirement income, and employee benefits for people and businesses building a more confident tomorrow. Strategies rooted in strength and backed by experience. Ask a financial professional how Pacific Life can help you today. Pacific Life Insurance Company, Omaha, Nebraska, and in New York. Pacific Life and Annuity, Phoenix, Arizona. digital ocean has just made an 111 million dollar acquisition of an ai company so today on the podcast we're going to be diving into why it made that move what it plans to do and what this company is so without further ado let's jump into it so the headline story here is the fact that digital ocean has acquired paper space which is a cloud computing startup which has a very strong focus on ai especially since this whole ai boom has started happening and i think what's really interesting is that it is currently buying this for 111 million dollars in cash now at the moment we're seeing a lot of different acquisitions in the space a lot of different companies are grabbing these ai startups because they know overall not only does it increase their bottom line a lot of money is flowing into ai right now but also they don't want to be left behind and digital ocean which is a publicly traded company they went public in 2021 definitely wants to make sure that they're staying on the space you know it's kind of funny because it's definitely a good business decision, but also as far as their stock price goes, there's a lot of investor sentiment around investing in AI companies.

1:33And so they definitely want to maintain a strong hold there. But what I do think is really interesting is unlike some other acquisitions we've seen specifically with Mosaic ML, which was just acquired by Databricks, that was a massive acquisition for a lot of money. But when they did kind of the headline, you know, billion dollar acquisition headline, they said that a big chunk of that was in shares so they were actually using the they're paying a lot of that in stock of the databricks now the problem with that is the last time that databricks had a their valuation set was free kind of valuation tanking in 2022 so they were using a 2021 valuation which arguably it should be half of that so when you kind of saw that headline of you know databricks is buying this this for i think it was 1.5 billion you can verify over a billion dollars but in reality I believe it was actually much much less because they're buying that in stock and the stock is inevitably going to be worth a lot less than uh you know what their last valuation was so the reason I bring that up is because this is an interesting move where paper space is being acquired for all cash so no stock all cash 111 million dollars and even if they were doing you know some sort of stock thing at this point DigitalOcean is publicly traded so the price is the price you know it's adjusted live on the stock market so let's talk a little bit about why they're doing it and what these companies are you know hoping to gain from this so DigitalOcean's CEO is Yancey Sprill and Yancey recently said that Paperspace's infrastructure and tooling once integrated with DigitalOcean's products is going to essentially allow customers to move and to more easily test, develop, and deploy AI applications.

3:16So for Paperspace's customers, I believe this is also going to be a bit of a benefit for being able to move over to DigitalOcean's cloud services. And because DigitalOcean, you know, this is a company that I have actually used in the past and have been very, very happy with. They're amazing customer service, really well-made product, I would say, from what I just my experience with them. But they have this really awesome offerings as far as databases storage app hosting which is what i used it for was app hosting they have a lot of really good documentation tutorials and a really robust support system overall so i actually think this is going to be really awesome for paper space to be plugging plugging into this i think this is a win-win um for both companies um paper space is going to remain a standalone business unit within kind of digital oceans umbrella and so paper space customers aren't going to see immediate changes in their service but you know who knows how this changes in the future with these acquisitions and mergers, sometimes that happens down the line.

4:09So a direct quote from Sprill, which is the CEO of DigitalOcean, said, We're excited to expand our portfolio tailored to the world's small and medium-sized businesses and startups with simplified AI machine learning offerings. The combined offering allows customers to focus more on building applications and growing their businesses and less on the infrastructure powering them. I think what's interesting is PaperSpace was actually co-founded back in 2014. And it was backed by Y Combinator and Jeff Carr, who was one of the co-founders of DigitalOcean. So obviously, PaperSpace has had actually a pretty significant tie to DigitalOcean for a very long time since, you know, 2014.

4:52And now as they're making this bigger move into AI and DigitalOcean has gone public, all of a sudden, you know, DigitalOcean is going to go and acquire the entire company, which is kind of a trend I see a lot. You know, some companies have deep ties for a long time, and eventually the bigger company just kind of eats up some of its investments because they know it's just a really good thing to add into their portfolio overall. So the company essentially runs its own data centers with custom configured GPUs. And initially when PaperSpace first launched, they were kind of focused more on these low-cost virtual machines that were providing really high-performance workstations for design, visualization, and gaming in the cloud.

5:36But as this whole AI revolution is happening and becoming really mainstream, Paperspace has started focusing a lot more heavily on their AI offerings. And so they actually launched an entire suite of tools that were specifically designed for developing, training, deploying, and hosting AI models in the cloud, which is a pretty powerful use case, especially you know you can see right now so prior to the actual acquisition paper space has raised over 35 million dollars and they they raised that from a number of different people including battery ventures intel capital sinway ventures and sorenson capital so they've obviously raised some money in the past and i think that herb kind of sees this acquisition as a step towards a more comprehensive offering for cloud CPU and GPU compute.

6:28And essentially, I think they're hoping to rival a lot of other vendors that are in this sort of public cloud market by combining Digital Ocean and Paperspace. And I think this is actually going to lend them perhaps an entire new class of customer, particularly some that are on a tighter budget, right? Right now in AI, we see these massive companies, we see Google and Microsoft and, you know, even Salesforce, but a lot of these big companies, a lot, most of them publicly traded that are making some massive moves in AI. But I do believe there is going to be a big step where a lot of medium and small sized businesses, they want some of these same tooling, they want to integrate this in some of their own data.

7:05And so I think that this is going to be a product that really appeals to them, it allows them to really get into AI and machine learning driven apps, generative media, LLMs, recommendation engines and image classifiers, a lot of things that, you know, smaller and medium sized businesses would like to use. Erb, when he was kind of commenting on this whole thing, you know, he said, DigitalOcean is renowned for simplifying complex cloud solutions and making them more accessible to developers and businesses alike. And then he also said, we're thrilled to join forces with DigitalOcean as we believe there is no better company to unlock the endless possibilities of AI and machine learning for developers and businesses alike.

7:44So I think this is going to be a really big move in this space. Dylan Erb, obviously, who's giving those quotes, was a co-founder of Paperspace. And so I think that this acquisition is not the first acquisition DigitalOcean has made, but it is the first one they've made since 2022. So back then, they bought a cloud computing service provider called Cloudways. They bought it for about$350 million. dollars um so this is i think their fourth public offerings or uh their fourth fourth acquisition since their public offering back in 2021 um and so i guess kind of from like a from a macro perspective looking at this i think this is going to be a pretty good move for digital ocean um i think they don't want to be left behind in this surge for ai cloud computing and machine learning solutions.

8:37And I think what is really good, you know, their company's revenue has increased from Q1 of this year. It grew about 30 % to 165 million. So obviously they are seeing some pretty big growth. Return on equity and net margins allegedly fell short of expectations. There's, you know, always people complaining about something. But overall, like the company's revenue increasing 29 % is amazing in my opinion. I think big tech cloud providers like Microsoft, Amazon, and Google are really right now focusing on generative AI to boost revenue. That's a big thing that they're doing. They're focusing on boosting revenue.

9:17Everyone is using it. Everyone's experimenting. Every company is tinkering with it. And there's a lot of actual money to be made beyond just hypotheticals. And they're seeing it to some degree of success. Everyone's trying to woo woo these big AI companies to come onto their cloud platforms. And there are some interesting moves that are still happening. One thing I will say, there was a recent poll done by CNBC, and it found that AI is now the biggest spend for about 50 % of top executives across the economy. And so I think this is a really smart place if you're going to invest your capital from a corporate side.

9:53This is a very smart place to deploy it. This is where everyone is putting their money in and experimenting right now. Some things will win, some things will fail, But the, you know, people will try everything and everything is being experimented on. And so I think this is a really good move. And in addition to this, Gartner predicts that cloud spending is going to grow about 21 % this year, coming in just under$600 billion. And it was at about$490 billion last year. So overall, I think this is an amazing play by DigitalOcean. This is going to be a really big acquisition. I think it's going to pay off very quickly.

10:29um paper space seems like a very cool company i was looking through what they do earlier today overall i think it's an awesome company and i think this is a really good move for digital ocean for their stock price but also just for their overall company and for their customers