As a player in the burgeoning Internet of Things (IoT) landscape, Digi International (NASDAQ:DGII) is positioned to ride a wave of innovation and growth. Despite a lull in recent earnings and an FY24 projection of more of the same, the company appears poised for future growth, fueled by well-timed acquisitions and a strategic transition towards a recurring revenue business model. With the share price up nearly 17% year-to-date, DGII stock appears fairly valued, with growth at a reasonable price (GARP) potential if the company can successfully execute.
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Welcome to the IoT
Digi International provides Internet of Things (IoT) connectivity products, services, and solutions for business and mission-centric applications.
Digi has strategically shifted its business model towards a recurring revenue approach and engaged in a series of acquisitions designed to expand its offerings and drive sales growth. Significant purchases include 2019’s Opengear for ~$140 million, Haxiot in 2021, Ctek later that year, and their most substantial acquisition, Ventus, in November 2021 for approximately $350 million.
The company is well-positioned to benefit from the growth potential in the IoT industry, which has been projected to grow by over $1 trillion in the next five years, demonstrating a robust CAGR of 15.12%. The rise and integration of artificial intelligence (AI) will only accelerate innovation in the space.
Recent Results
Digi has had a strong track record of growing its earnings – until last year.
The company recently released its Q1 2024 financial results, revealing a slight revenue decline (though it still surpassed expectations). The company’s reported revenue was $106.1 million, down 2.9% from the same quarter in 2023. However, despite the decrease in revenue, Digi exceeded expectations with a non-GAAP EPS of $0.48, beating consensus estimates by $0.04.
Management has given guidance that FY24 revenue will be on par with the previous year. However, it remains committed to executing a strategy to enhance the Annual Recurring Revenue (ARR) as well as adjusted EBITDA to $200 million in the next five years, doubling from current levels.
Where the Stock Stands Now
DGII stock has been trending up, gaining 16.67% year-to-date. It trades towards the lower middle of its 52-week range of $21.25-$42.95 and above the 20-day (29.19) and 50-day (27.91) moving averages, demonstrating ongoing positive price momentum.
However, from a valuation perspective, the recent upward movement in price has pushed the stock into fair-to-rich value territory relative to the industry. Ignoring the gaudy P/E ratio of 69.2x, the P/S of 2.5x presents a more balanced picture, measuring below the Technology Sector average of 4.7x but above the Communication Equipment Industry average of 1.8x
Overall, at these levels, the stock’s potential for ongoing upward movement appears to be baked in and fully reflected. However, if the company can reignite earnings momentum, investors may be getting growth at a reasonable price (GARP).
What is the Price Target for DGII in 2024?
Analysts covering DGII stock are bullish about its prospects. Stephens analyst Tommy Moll recently raised the firm’s price target to $45 from $40 and maintained a Buy rating on the stock. He believes management’s ongoing successful business model transition will continue to drive the share price higher.
DGII is currently listed as a Strong Buy based on four Buy ratings in the past three months. The average 12-month price target of $40.50 represents an upside potential of 36.27% from the current levels.
Big Picture
Digi’s strategic acquisitions and shift towards a recurring revenue model suggest a forward-thinking approach to capitalize on robust opportunities in the IoT space over the next five years. With positive recent stock momentum, bullish sentiment, and the allure of further upside performance, Digi presents an intriguing opportunity for investors.
However, it’s crucial to note that the company’s current valuation reflects most of this optimism. Thus, significant earnings advancement will be required for the long-term investor’s benefit. If GARP investing is your game, digging deeper into DGII is warranted.
