I believe Digerati (OTC:DTGI) is undervalued and recently released their Q2 2021 earnings, reporting 114% Revenue Growth to $3.326 Million with profits of $1.892 million. This is half of the revenue they recorded in the entire of their fiscal 2020, in a single quarter!
Digerati closed a $20 million secured credit facility with Post Road Group back in November 2020 to allow them to expand their operations through acquisitions and growth, with $14 million of this used for their Nexogy, Inc. and ActivePBX acquisitions. In their recent presentation at the Virtual Investor Summit, CEO Arthur Smith answered a question regarding whether this credit line can be increased in the future, stating that “Post Road Group very much wants us to continue our M&A strategy”, and went on to suggest that with their improved cash flow thanks to their current acquisitions this credit facility can increase.
In February, they announced that they have eliminated all derivative liability relating to convertible debt owned by institutional shareholders. This was done “through a combination of accelerated conversion to equity at a fixed price and in the form of a new one year note with a fixed-priced “floor” on conversion that can be prepaid at any time by the Company”. In other words, there will be no harmful dilution from any previous debt. This coupled with the new financing agreement above and revenue streams sets up an extremely healthy looking company.
The balance sheet isn’t perfect; DTGI’s liabilities outweigh their assets by $3.267 million in their recent quarterly filing. But we know they are working on refinancing based on the February announcement, and if we look into that 10Q which was filed in January, $6.462 million is listed under derivative liability. So while that debt wont have disappeared, we know it has been restructured and thus will change the look of their next filings. Recent years have been focused on acquisitions and growth that necessitated taking on debt but this is clearly being handled responsibly.
Competitors of DTGI stock
A number of comparisons were outlined in the investor presentation, captured in a screenshot below. Based on the most recent quarterly revenue, multiplying that by 4 would give an annualized figure of $13.3 million. At the time their slides were written, the DTGI share price was higher giving them a market cap of $29 million and therefore a price-to-sales ratio of 2.2; right now this at is 1.93.
One comparable company, Crexendo (CXDO), trades on NASDAQ with a market cap of $125 million at their time of writing and $15.8 million in revenue – a 7.9x multiple! Looking through the CXDO financials we see their revenues steadily growing from $9 million in 2016 by ~10% YoY for a couple of years until jumps to $14.44m and $16.39m reported in the last two financial years. Clearly by comparison DTGI is in a particularly explosive growth phase when it comes to revenues due to the acquisitions, but as they establish themselves with the customer base they’ve made and continue to grow those subsidiaries, their revenues should be set to grow steadily with the projected market growth (discussed below) in much the same way. For reference, CXDO uplisted from OTCQX to NASDAQ on July 8 2020.
Other examples shown in the presentation slides fall between 2.0 and 6.9 P/S ratio averaging 4.0, with some being much larger entities with an operating income deficit. The numbers make for very optimistic reading in terms of future growth for DTGI.
Future plans for DTGI
In the same investor presentation, Art emphasized multiple times that the goal is to uplist to a major exchange such as NASDAQ or NYSE. Last year Digerati engaged Maxim Group LLC as its financial advisor for their expertise in bringing companies to uplist. This is an incredibly important step to them in order to be able to be able to utilise the full potential of their share structure to drive acquisitions in the future. They understand that with the current share price they cannot use this as a means to generate cash flow while protecting shareholder value.
DTGI is poised to grow massively over the next 2 to 5 years and their aggressive growth and acquisition strategy is clearly being well received by investors. Their revenues are growing rapidly, the market they operate in is growing and they don’t show any signs of slowing down. The CEO has decades of experience in the industry, having previously co-founded GlobalScape which was traded on the NYSE and recently acquired by HelpSystems for $9.50 per share.
The DTGI share price has been incredibly resilient given the hammering that a significant number of OTC stocks have taken recently. It’s currently down 26% from its 52-week high of 0.2360 a week or so ago with daily volume averaging around 1M right now. Having held around the 0.12 to 0.14 range during the broader market selloff earlier in March the downside risk to reward potential seems highly favorable.