The Internet of Things (IoT) is rapidly expanding and is expected to double the number of connected devices by 2030. Digi International (NASDAQ: DGII) is well-positioned to capitalize on the burgeoning sector. However, despite beating top-and-bottom-line forecasts over the past few quarters, the stock has declined by 41% over the past year, and guidance for the near term suggests lower expected growth.
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The stock trades at a relative discount, suggesting a potential opportunity for contrarian-oriented value investors. However, it may be worth waiting for a positive turn in price momentum before making a move.
Digi’s Transitioning Revenue Model
Digi International (DGII) is a major supplier of Internet of Things (IoT) and connectivity products and services, offering a diverse range of hardware and software solutions used across myriad industries, such as industrial automation, energy, transportation, and healthcare.
Digi is transitioning to a recurring revenue model designed for higher predictability and profitability than traditional models. This shift is expected to enable increased predictability and profitability and allow further capital expenditure on research and development, fueling future innovative product development.
Digi’s Recent Financial Results & Outlook
In Q2 of 2024, Digi surpassed expectations, reporting revenue of $107.7 million, beating estimates of $106.99 million. Yet, this represented a 3% dip in performance compared to the same quarter in 2023. Gross profit margin experienced a year-over-year improvement, escalating by 130 basis points to 57.9%. The net income for the period declined to $4 million from $6 million the previous year. However, earnings per share (EPS) of $0.49 beat analysts’ estimates of $0.47.
Management has indicated it is focused on reducing the company’s debt while optimizing inventory levels as the supply chain normalizes. The company managed to reduce its net outstanding debt to $172 million by the end of the quarter and debts net of cash and equivalents to $148 million by paying towards their new revolving credit facility. Their inventory remains high but shows a decline, forecasting the promise of future working capital benefits.
The company has also stated its goal to double its Annual Recurring Revenue (ARR) and Adjusted EBITDA to $200 million over the next five years. They are looking into expanding their acquisition pipeline, paying more attention to scale and ARR, and marking acquisitions as a top priority.
Despite the positive first-half results, management has given guidance for softer top-line expectations and slightly lowered Adjusted EBITDA ranges from 0 to 5%, with a projected revenue decrease of 5% year-over-year. The third fiscal quarter projections include revenues between $103 million and $107 million, adjusted EBITDA between $24.0 million and $25.5 million, and adjusted net income per share between $0.47 and $0.51.
What Is the Price Target for DGII Stock?
Analysts following the company have taken a cautiously optimistic outlook on the stock. For instance, Piper Sandler analyst Harsh Kumar, a five-star analyst according to Tipranks ratings, recently lowered the price target on the shares from $35 to $29 while downgrading the rating from Overweight to Neutral. He noted that the company is in the early stages of a transition, targeting an attractive end-market with significant opportunity for expansion in the future.
Digi International is rated a Moderate Buy based on two analysts’ aggregate recommendations and recently assigned price targets. The average price target for DGII stock is $29.00, representing a potential upside of 27.75% from current levels.
The stock has been volatile, climbing 24% from January to April, then shedding roughly 29%. It trades at the bottom of its 52-week price range of $21.25 – $42.95 and continues to show negative price momentum, trading below its 20-day (23.07) and 50-day (24.78) moving averages. With a P/B ratio of 1.52x, the stock appears to be relatively undervalued compared to peers in the Communication Equipment industry, where the P/B average stands at 2.5x.
Bottom Line on DGII
Amidst the rapid expansion of the Internet of Things (IoT), Digi International stands to benefit from its broad portfolio of IoT products and services. Despite recent beats, the shares have declined 41% and trade at a discount, indicating a potential opportunity for value investors. However, current price momentum suggests investors might benefit from waiting for more positive trends to take hold first.
