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When Should You Buy Digi International Inc. (NASDAQ:DGII)?

Simply Wall St

Digi International Inc. (NASDAQ:DGII), which is in the communications business, and is based in United States, led the NASDAQGS gainers with a relatively large price hike in the past couple of weeks. As a stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, what if the stock is still a bargain? Let’s examine Digi International’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

See our latest analysis for Digi International

Is Digi International still cheap?

According to my relative valuation model, the stock seems to be currently fairly priced. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 30.58x is currently trading slightly above its industry peers’ ratio of 30.53x, which means if you buy Digi International today, you’d be paying a relatively fair price for it. And if you believe Digi International should be trading in this range, then there isn’t really any room for the share price grow beyond what it’s currently trading. So, is there another chance to buy low in the future? Given that Digi International’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of Digi International look like?

NasdaqGS:DGII Past and Future Earnings, July 25th 2019

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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. However, with a negative profit growth of -9.2% expected next year, near-term growth certainly doesn’t appear to be a driver for a buy decision for Digi International. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Currently, DGII appears to be trading around its fair value, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in 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 DGII, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on DGII for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The price seems to be trading at fair value, which means there’s less benefit from mispricing. In addition to this, 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 gel your views on DGII should the price fluctuate below its true value.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Digi International. You can find everything you need to know about Digi International in the latest infographic research report. If you are no longer interested in Digi International, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.