iStock.com/metamorworks Digi International Inc.: High Prospects in the Age of IoT We all know about the expected strong growth in the Internet of Things... Digi International Inc.: Why this Small IoT Play Has Great Upside Prospects
Digi International Inc. Why this Small IoT Play Has Great Upside Prospects
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Digi International Inc.: High Prospects in the Age of IoT

We all know about the expected strong growth in the Internet of Things (IoT) segment, as “5G” technology comes online and powers devices’ ability to communicate with each other in a nearly instantaneous manner.

An intriguing IoT small-cap play that could return strong gains is Digi International Inc. (NASDAQ:DGII) with a market-cap of around $338.0 million.

While Digi International has been around for over 30 years, the company hasn’t yet been able to break out. But perhaps things are about to change.

Digi International Inc. sells to global clients in food service, retail, healthcare, transportation and logistics, and education. What makes the company particularly interesting is its focus on making machine-to-machine (M2M) communication hardware for the IoT segment.

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DGII stock outperformed the S&P 500 this year, returning 19.33%. And there could be much more to come on the improving fundamentals.

Chart courtesy of StockCharts.com

The DGII stock chart shows the stock trading at around trend line support and the 50-day moving average.

An upward breakout would initially target $15.00, while the downside risk is $10.50 to $11.50.

My Fundamental Bullish Thesis for DGII Stock

To say Digi International Inc. has done very little over the past five fiscal years is an understatement.

Revenues have barely moved and saw declines in three of the past five years before a 25.73% increase to $228.37 million in fiscal 2018.

Fiscal Year Revenue ($Millions) Growth
2014 $192.70 -1.4%
2015 $203.85 5.8%
2016 $203.01 -0.4%
2017 $181.63 -10.5%
2018 $228.57 25.7%

(Source: “Digi International Inc.,” MarketWatch, last accessed June 21, 2019.)

The growth rate doesn’t appear to be sustainable but the positive is revenues are expected to extend.

For fiscal 2019, Digi is estimated to ramp up revenues by 11.6% to $254.91 million and follow this with a 6.7% rise to $271.89 million in fiscal 2020. (Source: “Digi International Inc. (DGII),” Yahoo! Finance, last accessed June 21, 2019.)

Digi has also produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and profits in five straight years, which is impressive for a company of this scale. EBITDA grew in three of the last five years.

Fiscal Year EBITDA ($Millions) Growth
2014 $7.35 -58.8%
2015 $17.15 133.3%
2016 $23.01 34.1%
2017 $13.32 -42.1%
2018 $17.97 35%

(Source: MarketWatch, op. cit.)

The profit picture needs some work, as Digi International Inc. has recorded two straight years of negative earnings growth:

Fiscal Year Diluted EPS Growth
2014 $0.07 -68.2%
2015 $0.26 273.1%
2016 $0.53 101.3%
2017 $0.35 -33.4%
2018 $0.05 -86.5%

(Source: Ibid.)

The good news is that Digi is estimated to grow its earnings to $0.32 per diluted share in fiscal 2019 and as high as $0.56 per diluted share in 2020, which would be a record. (Source: Yahoo! Finance, op. cit.)

DGII produced positive free cash flow (FCF) from fiscal 2015 to fiscal 2017 before a disappointing negative $4.62 million in fiscal 2018, the worse reading in five years.

But given the expected earnings growth, I would expect Digi to produce much better FCF over the next two years.

Fiscal Year Free Cash Flow ($Millions)
2014 -$1.61
2015 $9.57
2016 $24.36
2017 $0.70
2018 -$4.62

(Source: MarketWatch, op. cit.)

Analyst Take

Digi International Inc.’s improving fundamentals should translate into a higher share price on the horizon.

The strong institutional ownership of 170 institutions holding 81.32% of the outstanding shares is bullish, especially for a small company. (Source: Yahoo! Finance, op. cit.)

DGII stock trades at 22 times its high estimate and a price/earnings-to-growth ratio of 2.02. Both are not cheap, but given the potential in the Internet of Things market, DGII stock is worth a higher multiple.

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