While Digital Bros S.p.A. (BIT:DIB) might not be the most widely known stock at the moment, it saw a significant share price rise of over 20% in the past couple of months on the BIT. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s take a look at Digital Bros’s outlook and value based on the most recent financial data to see if the opportunity still exists.
See our latest analysis for Digital Bros
Is Digital Bros still cheap?
The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Digital Bros’s ratio of 12.83x is trading in-line with its industry peers’ ratio, which means if you buy Digital Bros today, you’d be paying a relatively reasonable price for it. Although, there may be an opportunity to buy in the future. This is because Digital Bros’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
What does the future of Digital Bros look like?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. Though in the case of Digital Bros, it is expected to deliver a highly negative earnings growth in the next few years, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.
What this means for you:
Are you a shareholder? DIB seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on DIB, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on DIB for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on DIB should the price fluctuate below the industry PE ratio.
With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 2 warning signs for Digital Bros (1 is concerning) you should be familiar with.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About BIT:DIB
Digital Bros
Develops, publishes, and distributes video games in Europe, the Americas, and internationally.
Reasonable growth potential with mediocre balance sheet.
