What Drove Riverwater Partners Small Cap Strategy to Invest in Digi International (DGII)?

Riverwater Partners, an investment management company, released its “Small Cap Strategy” Q3 2025 investor letter. A copy of the letter can be downloaded here. The Small Cap Core Strategy reported solid results for the quarter but did not keep pace with the sharp rally, thus lagging the benchmark. The market’s preference for lower-quality companies persisted in the quarter and contributed significantly to the benchmark’s outperformance. On the other hand, the strategy remains focused on higher-quality companies with enduring fundamentals, consistent revenue, and a transparent path to profitability. The firm strongly believes that the strategy is well-positioned in the challenging quarter. In addition, you can check the fund’s top 5 holdings to determine its best picks for 2025.

In its third-quarter 2025 investor letter, Riverwater Partners Small Cap Strategy highlighted stocks such as Digi International Inc. (NASDAQ:DGII). Digi International Inc. (NASDAQ:DGII) provides business and mission-critical Internet of Things (IoT) products, services, and solutions. The one-month return of Digi International Inc. (NASDAQ:DGII) was 17.29%, and its shares gained 36.48% of their value over the last 52 weeks. On December 15, 2025, Digi International Inc. (NASDAQ:DGII) stock closed at $45.19 per share, with a market capitalization of $1.683 billion.

Riverwater Partners Small Cap Strategy stated the following regarding Digi International Inc. (NASDAQ:DGII) in its third quarter 2025 investor letter:

“Digi International Inc. (NASDAQ:DGII) is a leading global provider of business and mission-critical Internet of Things (“IoT”) connectivity products, services and solutions. DGII helps its customers deploy, monitor and manage critical communications infrastructures that deliver important information in demanding environments with high levels of security and reliability.

The IoT industry is in the midst of a multi-year expansion as many industries are undergoing a digital transformation within their business that drives demand for IoT capabilities across a broad spectrum of services. Among others, IoT use cases include providing and maintaining secure connectivity and monitoring of operating assets, condition-based monitoring of perishable goods, and automating workflows and operations. As AI becomes more ubiquitous, edge applications, including IoT applications, will be the next beneficiaries.

Historically DGII revenues have been based on one-time product sales; more recently, DGII has placed greater emphasis on selling subscription-based solutions. Recurring revenue has grown from 4% to 27% of total between 2019 and 2025, resulting in 800bp of margin expansion and greater visibility. We expect this trend to continue as the company deploys more solutions for its customers, which will drive free cash flow generation and stock appreciation.”

In addition, please check out our hedge fund investor letters Q3 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.