We wanted to do a one-year-later review on Impinj (PI), but October came and went, and we ran out of time.

Here’s our original article from October 2023: https://www.fool.com/investing/2023/10/03/1-top-small-cap-chip-stock-that-could-be-poised/  Impinj is up some 200% since then! We didn’t buy (there was no room in our small-cap and small-bets basket), but maybe a few of you did. Congrats if so!

For everyone else, let’s review this small chip company, and if the incredible rally has legs.

Chip acronym quiz time! RFID, NFC, and RAIN

Impinj helped pioneer RFID, or radio-frequency identification, technology. RAIN is one type of RFID, using ultra-high-frequency (UHF) standards. Impinj, Google, and others started the RAIN Alliance in 2014 to promote this branch of RFID semiconductor tech. https://rainrfid.org/what-is-rain-rfid/ 

You might already be an everyday user of RFID technology without even knowing it. NFC (near-field communication) on your debit/credit card, smartphone, and watch is used to enable tap-to-pay. The main differences between NFC and RAIN, besides differences in designed use, include:

• NFC chips operate at a lower radio frequency, versus UHF for RAIN
• NFC works only at close range, versus up to ~10 meters of detection range for RAIN
• NFC reads one tag at a time – put another way, data transmission rates are much slower for NFC than RAIN; RAIN readers can scan up to 1,000 tags simultaneously

Here’s Inpimj’s explainer if you’re interested: https://www.impinj.com/library/blog/nfc-vs-rfid-and-rain-rfid-differences-and-similarities 

What’s RAIN RFID used for?

While NFC has become commonplace in digital payments and other tap-to-”whatever” applications, RAIN has found a home in retail and logistics, as well as office and equipment management. Here’s a list of Impinj’s customer stories, including the really big one the last couple of years, Walmart. https://www.impinj.com/library/customer-stories https://www.impinj.com/library/blog/walmart-makes-big-rfid-commitment-with-sweeping-tag-mandate 

In fact, Walmart’s usage of Impinj RAIN tech is what eventually led to the article we published last October. We had been doing a bit of research into who could solve the retail industry’s “shrinkage” problem – a really nice way of describing theft. https://www.fool.com/investing/2023/01/01/can-nvidia-help-walmart-and-target-solve-theft/ 

This is a brilliant application of semiconductor technology. RAIN RFID tags (small chips) with a unique identifying number are passive, meaning they require no power source. Instead, the identifier in the tag gets its “power” when its scanned by a RAIN reader’s electromagnetic field (the RAIN RFID reader is powered, like by a battery in the case of a handheld scanner). Thus, RAIN is a way to bring basic internet and/or network connectivity and data to virtually any object. Why would that make sense?

Let’s say you’re Walmart, and you’re trying to figure out inventory that’s illegally leaving your store. Slap a RAIN chip on it. Or better yet, with things like clothing, require your supplier to embed a tiny RAIN chip into the garment. Now you know where the merchandise moved within the store, when it left, and where.

Or if you’re a logistics company, let’s say an airline. Tracking the location of luggage and other items that customers paid to have shipped would have some advantages. RAIN can also help with inventory management. Remember that bit about up to 1,000 RAIN tags being able to be scanned all at once?

Companies are able to put these small RAIN chips (and the related RAIN readers, which look like a barcode scanner, and software to operate it all) because RAIN RFID is cheap. Each RAIN tag might cost just a few cents. 

https://www.impinj.com/products/impinj-platform

Interestingly, in our write-up last year, Impinj had Tower Semi (TSEM) listed as a supplier in their annual report, alongside primary supplier Taiwan Semi Manufacturing (TSM). In the annual report since then, all mention of Tower has been dropped, leaving TSMC as the only RAIN RFID wafer supplier mentioned. That probably says a lot more about TSMC than it does Tower or Impinj. TSMC can offer superior semi tech at a reasonable price unlike anyone else. https://d18rn0p25nwr6d.cloudfront.net/CIK-0001114995/d971e24c-8551-4771-a184-70b4884eeac9.pdf pg 60 

Cheap chips = superior stock price gains for forever?

The reason for Impinj’s 200% rally in a year isn’t spectacular. Remember this chart? Impinj was beaten down this time a year ago, and sales have begun to recover – albeit at an unimpressive-looking pace. 

But as revenue has made a comeback, profit margins have spiked (TSMC pricing getting more favorable, better Impinj customer mix, something else?).

If you want to make cool financial charts and models like we did above, check out FinChat.io. Here’s a link that gets you 15% off a membership: https://finchat.io/csi/ 

Yes, RAIN RFID is a fast-growing part of the “Internet-of-Things” (IoT) theme. But the above charts really illustrate a key milestone for a publicly-traded company – or any company for that matter. Turning a profit.

Wall St. really likes to be a part of a company journey at this critical point in time. It isn’t unusual to see a previously languishing stock skyrocket during this transition from loss to profit, when a business model is finally legitimized.

In other words, Impinj was a great pick last year because of this turning-a-profit event. It doesn’t mean the stock will keep trucking higher at the same pace.

Will the RAIN RFID biz model make it rain investment returns in 2025?

In hindsight, now knowing Impinj can indeed sustain a quarterly profit for a few quarters in a row, the stock was cheap. That’s not the case anymore. At a trailing-1-year P/E ratio of ~190x, and ~75x on 1-year-forward analyst expectations, Impinj stock is pricing in a few years-worth of rapid profit growth.

As pointed out last year, we’d like to see some more robust software and recurring service revenue mixed into Impinj’s ecosystem. That would make sustainable profitability an easier achievement. 

But remember the “no moats in hardware either” problem? Impinj has competition from other RFID chip manufacturers, it has customer concentration (44% of revenue last year came from just two customers, RFID device manufacturers Avery Dennison and Arizon), and end-market demand (like from Walmart) is really lumpy. 

Also muddying the view into our crystal ball, there was a sizable $15 million in one-time IP licensing revenue for Impinj in Q2 earlier this year. Impinj has been winning patent infringement lawsuits against NXP Semi (NXPI), which led to the extra bump in revenue. Don’t count on that lasting forever. https://www.impinj.com/about-us/news-room/2024/impinj-announces-successful-settlement-of-patent-litigation https://www.impinj.com/library/blog/impinj-wins-patent-lawsuits-against-nxp 

But then again, maybe Impinj is on a new multi-year run higher as end markets in retail and logistics stabilize and rebound. A lot of new customers may adopt RAIN in their businesses too, which would benefit Impinj.

Nevertheless, whereas last year we took a serious look at Impinj with an eye to possibly buying, this time around we’re personally looking and passing. Revenue and profit growth could be slowing when excluding the licensing revenue from NXP. We’re unsure of whether profitability can grow fast enough to support the 200% stock price spike. 

But that doesn’t mean we should drop it from coverage. RFID tech has so many interesting use cases that have yet to be fully fleshed out outside of personal computing (smartphones, wearables, and such). Let’s keep Impinj on the CSI radar.