IoT Expansion And Edge Computing Will Empower Digital Transformation

Key Takeaways

• Accelerating adoption of software subscriptions and enhanced product offerings poises Digi for stronger earnings, margin expansion, and long-term top-line growth beyond current expectations.
  
• Efficient operations, robust cash flow, and a flexible supply chain empower Digi to pursue rapid expansion, M&A, and resiliency amid global market changes.
  
• Digi faces pressure on margins and growth due to competition, supply chain risks, hardware commoditization, evolving regulations, and challenging market and customer dynamics.

Catalysts

Provides business and mission-critical Internet of Things (IoT) connectivity products, services, and solutions in the United States, Europe, the Middle East, Africa, and internationally.

• Analyst consensus views ARR growth as stabilizing and improving margin, but this likely understates potential: Digi is still under 50 percent software attach rate and has only begun deploying its "Ventus" subscription model across its cellular router business, meaning ARR could accelerate meaningfully as attach rates rise and the model penetrates its large installed base, providing a step-function increase in earnings and margin expansion.
  
• While analysts broadly acknowledge free cash flow generation supporting de-levering, the current 9 percent free cash flow yield, rapid net debt reduction, and capital-light operations indicate Digi has the potential to aggressively accelerate M&A and invest in growth without capital restraints, making double-digit revenue and EPS growth sustainable rather than cyclical.
  
• The explosive growth of connected devices in industrial, healthcare, and smart city contexts is poised to drive exponential demand for Digi's secure IoT hardware and software, which could result in much faster top-line growth than currently modeled, especially as global automation and digital transformation initiatives continue to expand Digi's addressable market.
  
• Digi's diversified and optimized supply chain, with proactive use of USMCA-compliant production and geographic supplier flexibility, sharply reduces exposure to tariff risk and enables faster, lower-cost fulfillment than competitors, protecting gross margins and supporting steadier revenue growth even in volatile trade environments.
  
• A recently expanded portfolio with enhanced solution breadth, including ongoing SmartSense upgrades and integration of Ventus capabilities, positions Digi to capture greater wallet share within existing customers and penetrate new high-margin verticals as edge computing and 5G rollouts advance, setting the stage for long-term, above-market profitability gains.

Digi International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Digi International compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Digi International's revenue will grow by 3.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.1% today to 13.0% in 3 years time.
• The bullish analysts expect earnings to reach $60.0 million (and earnings per share of $4.48) by about July 2028, up from $42.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 36.3x on those 2028 earnings, up from 29.2x today. This future PE is greater than the current PE for the US Communications industry at 28.4x.
• Analysts expect the number of shares outstanding to grow by 1.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Digi International Future Earnings Per Share Growth

Risks

• Geopolitical uncertainty and evolving tariffs could increase procurement costs and create production delays for Digi, directly impacting gross margins and future earnings, particularly if reciprocal tariffs escalate and supply chain agility is tested.
  
• Intensifying competition within the IoT connectivity marketplace, especially from larger and more vertically integrated players, may drive pricing pressure and margin compression, leading to slower growth in Digi's gross profit and net income over the long term.
  
• The risk of hardware commoditization in the IoT industry could erode Digi's addressable hardware margins and limit topline revenue growth as value creation increasingly shifts toward software and services, where Digi's attach rates are still under 50 percent across much of its portfolio.
  
• Fragmented IoT standards and the potential for large customers to develop in-house connectivity management solutions may lengthen sales cycles, limit customer uptake, and ultimately reduce Digi's recurring revenue growth and sales pipeline reliability.
  
• Heightened global data privacy and security regulations can drive up compliance costs and force product adjustments, posing a sustained threat to Digi's operating expenses and potentially constraining net margins as regulatory demands intensify worldwide.

Valuation

• The assumed bullish price target for Digi International is $45.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Digi International's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $460.3 million, earnings will come to $60.0 million, and it would be trading on a PE ratio of 36.3x, assuming you use a discount rate of 7.5%.
• Given the current share price of $33.25, the bullish analyst price target of $45.0 is 26.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.