Digi International Inc. Up 122% From March, More to Come on Move Into 5G

Digi International Inc. Up 122% From March, More to Come on Move Into 5GDigi International Inc’s Move Into 5G Could Power Growth

The Internet of Things (IoT) and 5G technologies are two of the top areas of growth for the next decade as more devices come on board. 5G will power incredible technologies. To play the IoT and 5G sectors, an intriguing small-cap stock with a terrific risk/reward ratio and potential for big gains is Digi International Inc. (NASDAQ:DGII).

At the time of this writing, Digi International stock is 28% off from its 52-week high of $18.99, but it has rallied by over 122% from its March low. Despite the bounce, DGII is underperforming, with a 4.6% one-year gain and a 22.4% decline in 2020. I view the current price as an attractive entry point.

Digi International is focused on developing machine-to-machine (M2M) communication hardware for the IoT segment. The company is also venturing into hardware and software for the 5G segment in anticipation of the strong growth of that field. In my view, this move could be a game changer.

The DGII stock chart shows the V-shaped rally from the March low and the breakout at $10, $11, and $12.50, which was on an upside trade gap.

Chart courtesy of StockCharts.com

If Digi International stock can extend the gains, watch for a potential move toward the next major resistance level around $15.00.

Strong 2021 Growth Could Jettison DGII Stock Much Higher

A look at the five-year revenue picture doesn’t immediately jump out at you.

Digi’s revenues have done little, but there are reasons to be optimistic, given the growth in 2018 and the five-year high in fiscal 2019 (September year-end).

Fiscal Year Revenue (Millions) Growth
2015 $203.9
2016 $203.0 -0.4%
2017 $181.6 -10.5%
2018 $226.9 24.9%
2019 $254.2 12.0%

(Source: “Digi International Inc.MarketWatch, last accessed August 17, 2020.)

Looking ahead, Digi International is estimated to see its revenue growth moderate to 9.4% to $278.1 million and to 9.6% to $304.9 million in 2021. The hope is that the move into IoT and 5G will power up revenues. (Source: “Digi International Inc. (DGII),” Yahoo! Finance, last accessed August 17, 2020.)

In the meantime, Digi International has been reporting positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and profits.

EBITDA grew in four of the last five years and diluted earnings per share (EPS) surged 491% in 2019.

Fiscal Year EBITDA (Millions) Growth
2015 $17.2
2016 $23.0 34.1%
2017 $13.3 -42.1%
2018 $18.9 42.3%
2018 $21.3 12.3%

(Source: MarketWatch, op. cit.)

Fiscal Year Diluted EPS Growth
2015 $0.26
2016 $0.53 101.3%
2017 $0.35 -33.5%
2018 $0.06 -83.1%
2019 $0.35 491.1%

(Source: MarketWatch, op. cit.)

Digi International Inc. is expected to see its profits fall to $0.22 per diluted share this year, prior to ramping up to $0.50 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

For a small company, it’s impressive that DGII generated positive free cash flow (FCF) in four of the last five years, including strong growth in 2019.

Fiscal Year Free Cash Flow Growth
2015 $9.6 Million
2016 $24.4 Million 154.4%
2017 $ 702,000 -97.1%
2018 -$4.6 Million -758.1%
2019 $19.6 Million 524.9%

(Source: MarketWatch, op. cit.)

Analyst Take

My bull thesis for Digi International stock lies with the strong tailwinds in IoT and 5G. If Digi International Inc. can gain scale in those sectors, there would be no reason to not expect the share price to jump.

Notably, institutions and insiders are backing DGII stock. About 191 institutions hold an 85.5% interest in the company’s outstanding shares. Insiders added almost a net 119,000 shares over the last six months. (Source: Yahoo! Finance, op. cit.)