Digi’s most recent quarterly report saw a rebound in EPS, thanks to management’s cost-cutting efforts. However, with a cautious outlook for fiscal 2025, one wonders if these measures are sustainable.
Digi International Inc. is an American technology company based in Hopkins, Minnesota, specializing in the Internet of Things (IoT) and machine-to-machine (M2M) communications. Founded in 1985, Digi is unique in its industry for its extensive portfolio of reliable wireless and embedded communication products, which facilitate connectivity across a wide range of applications in various sectors, including industrial, medical, and transportation.
The company offers a number of IoT products such as embedded modules, wireless routers, gateways, and communication devices. It further supports solutions such as remote device management using its Digi Remote Manager platform, professional design services, and condition-based monitoring solutions. The main revenue source is the sale of hardware products and associated software services.
Digi addresses a diverse clientele that includes energy, healthcare, retail, transportation, and industrial automation sectors. The end market seeks to implement IoT-based solutions to enhance operational efficiency and data management. Although Digi seeks to meet the burgeoning demand for IoT technologies internationally with robust connectivity solutions for various industry-specific needs, the growth comes with challenges.
The high use of Annualized Recurring Revenue (ARR) may not be so good for Digi International. Though ARR brings stability, it also denies the much-desired high-margin, one-time contracts fueling short-term growth. Additionally, the laser focus in a competitive tech market may be too narrow to quickly adapt to evolving demands. A cause for grave worry is that deal closures, though stabilized, remain decidedly slower than in the past, casting doubt over future revenue momentum.
Cybersecurity is another time bomb ticking for Digi. As a tech player, it’s extremely susceptible to cyber attacks, which could lead to stolen trade secrets, leaked client data, or operational shutdowns. It is not just a question of monetary loss, but a reputational blow to Digi that would take long to recover from. With increasingly sophisticated threats, the cost of staying secure is only growing, and so are the risks.
Frankly, we’re bearish on Digi. Flat revenue and EBITDA projections for fiscal 2025 suggest little room for excitement. While cost-cutting efforts are commendable, they alone won’t overcome sluggish earnings growth or global economic headwinds. For now, Digi seems stuck, offering little incentive for new investors. If you’re already holding shares, fine, but for others? Sit tight and watch – this ride isn’t going anywhere fast.
Digi International does not rank on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 16 hedge fund portfolios held DGII at the end of the third quarter which was 12 in the previous quarter. While we acknowledge the potential of DGII as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DGII but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
