How Far Will Digi International Run Up After Q3 Report?

If you enjoy uncovering those lesser-known, small companies that are racking up price and earnings gains because their products and services are hot, then you'll want to know about Minnesota-based Digi International Inc. DGII. 

This is a stock worth watching, as it's been forming a handle to a cup-shaped pattern that began in November when it retreated from a high of $43.68. 

Digi International reports its fiscal third quarter on Thursday, August 3, ahead of the opening bell. Analysts are expecting earnings of 41 cents per share on revenue of $109.27 million. That would be a decrease on the bottom line but an increase on the top line.

In the most recent quarter, the company topped sales and earnings views, as MarketBeat's Digi International earnings data reveal. It's exceeded views in each of the past five quarters. 

Stock Climbed 11% Immediately After Last Earnings Report

The stock gained nearly 11% on May 4, following the most recent report, and has advanced almost 30% since then. 

As you can see on the Digi International chart, the stock has been trending steadily higher, notching gains in 10 of the past 12 weeks after rallying from early May lows.  

That's exactly the kind of price action you want to see, as it shows institutional buyers are eagerly supporting the stock, something they only do if they believe more gains are ahead. Remember: The big institutions, who buy shares in bulk, don't day trade and flip shares; instead, they take weeks or even months to accumulate a position.

That's why it's so important to track institutional buying with the idea of following in their footsteps. Fortunately, you don't need to guess what they're buying, as it's all right there on the chart. 

More Institutions Buying Than Selling

MarketBeat's Digi International institutional ownership data show more institutional buying than selling in the past 12 months. 

Using the stock's chart, you can also track trading volume. Since the current uptrend began in May, there have been several weeks of above-average buying. That's also a sign of institutional support for a stock. 

The company provides Internet of Things ("IoT") connectivity products, services, and solutions to business customers, in particular, original equipment manufacturers. 

Security and reliability are crucial in those applications, as you can imagine. 

The Internet of Things refers to a network of physical objects, devices, or machines embedded with sensors and software that enable them to connect, exchange data, and communicate with each other, as well as with other systems over the Internet. 

The IoT encompasses various objects such as smart home devices, wearable tech, connected appliances, industrial sensors, and smart healthcare devices. 

Customers From A Range Of Industries

Digi's customers represent various industries, including banking, healthcare, retail, gaming, hospitality and food service, gaming, supply chain, and others. 

The company is well positioned at the intersection of some very hot computing trends, including the growth of the IoT, machine learning and AI, cloud computing, and the rollout of 5G technologies. 

Digi International sells hardware as well as software and professional services. The IoT products and services segment represented the majority of its sales in fiscal 2022. This segment sells both wired and wireless products that are either embedded into the products of equipment manufacturers or sold as stand-alone products. These offerings allow our customers to connect various types of gear to networks.

IoT Solutions Segment Growing Significantly 

Its IoT Solutions segment also grew significantly in fiscal 2022 primarily because of an acquisition. The segment includes monitoring services for perishable goods, such as food and medicine, and network connectivity for machines, such as ATMs and lottery kiosks, where security is paramount. These services are offered on a subscription basis, which the company says provides it with a stable base of recurring higher-margin revenue.

Earnings and revenue both grew at double-digit rates in each of the past six quarters. Wall Street has pegged earnings growth at 17% this year and 16% next year.

So how should you handle a promising stock so close to its earnings report?

Keep An Eye On Stock After It Reports

That's easy: Keep an eye on it, and watch how it acts after reporting earnings. If the stock advances, particularly if it makes a big jump or gaps higher, you could consider it actionable as long as it fits within other portfolio parameters, such as risk tolerance and existing allocations.

Waiting until after earnings protect you from a sharp downward movement if the report disappoints. Even if it gaps higher at the open and you miss the initial uptick, you still have time to move on it, as a gap higher typically suggests more buying is ahead, as institutions like what they heard.