Small-cap companies are some of the riskiest investments you can make, but they can pay off hugely if things go well for the company.

In this clip from Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Todd Campbell dive into what makes Impinj (NASDAQ:PI) -- a small-cap provider of RFID tags -- such an interesting company. Find out how Impinj makes its money, and how it's growing its market share; how Impinj is helping its customers gather big data from their own customers; some of the most important risks that investors should know about the company before buying in; what numbers and trends investors should watch to see how the company is doing; and more.

A full transcript follows the video.

This video was recorded on Sept. 22, 2017.

Dylan Lewis: This is a lesser-known name, a company by the name of Impinj. What exactly do they do?

Todd Campbell: It's interesting, because this is a lesser-known stock. It's the smallest stock of the three that we're going to talk about. But it's been around a long time. They do something called RFID, radio-frequency identification. This is something that retail has been dabbling with since the 2000s, trying to figure out, are there better ways to track and manage inventory? And I think it's fair to say that we're at the point now in the technology, we're at a tipping point. And we're going to see retailers, healthcare companies, travel companies, basically anything that has a good, a product that they want to take from manufacturing through distribution, through their warehouse to their stores or whatever to the actual end-user -- if they want greater intelligence into that, they're going to adopt some form of radio-frequency ID. And if that's the case, then Impinj could be perfectly positioned to benefit from it.

Lewis: And this type of tracking that we're talking about is really done with small devices, these little tags, right?

Campbell: Oh my God, yes. We're talking about, already, billions of these little tags being attached to goods, to pallets, to whatever, to be able to quickly identify them. So you've got these little tags, and these little tags cost pennies. They're extremely cheap. Then you've got readers that can be handheld, and then you have gateways that are much larger, and you can use those to track, say, what's in an entire warehouse all at once. And they're figuring out ways not only to be able to have this tag and to be able to read the information on the tag so they know where their product and good is, but also be able to tie that to software that provides all sorts of inventory insights along the chain, along that distribution cycle.

And that's why we're at a tipping point. You're seeing a lot of these big retailers saying, "Maybe I should tag every single item in my store, or every single item that goes in or out of my warehouse, so that it becomes easier for me to know if I have red shirts, blue shirts, green shirts in my store, where they happened to be located." There's all sorts of really cool, futuristic ways that companies can use RFID to not only eliminate waste, cut back on shrinkage, things like stealing, but also connect more with their customers.

Lewis: Todd, you mentioned all of the different elements that go into tracking. All these different hardware pieces and the software that goes into managing it. Where does Impinj play in this market?

Campbell: They're a relatively large player. They team up with others, like Avery Dennison, which accounts for a fairly large amount of their sales. This year, they're expected to supply 7 billion, 7.2 billion worth of tags to the industry, which would be 18% year-over-year growth. And they've got about 60% of the market. They have competition out there in different spots of what they do. But they like to say that they are the soup-to-nuts provider of RFID, meaning that they have not only the tags but the readers, the gateways, and the software to analyze all of that information.

Lewis: So they're selling a ton of tags. They're also selling a lot of stuff you need to manage this, on a broad-stroke level. What does that look like for them financially?

Campbell: Their revenue has doubled over the last four years. In 2016, it was up 43% to $112 million. They think they can get 25% annual growth for 2019-2020. In the second quarter, their revenue was up 31% to $34 million, and they showed a non-GAAP profit of about $0.06 per share. Now, there are some caveats here.

Lewis: There always are.

Campbell: Right, Dylan? There always are, especially when you're talking about small-cap stocks. They're still investing a lot of money. There's still a lot of moving pieces. We're at a tipping point, like I said, and it's not a guarantee that you're going to get even, steady growth. The growth may be double digits -- 20%, 30%, or even 40% one year, or it may be 15% [to] 20% or even less in another year. And that's because each one of these adopters, if they're going to be big, could use billions alone of these tags. And that means their rollouts would significantly affect how quickly this company is able to translate that into sales.

So you are going to have to kind of pay attention to the quarterly results with this company. See what they're saying as far as what deals are getting pushed out or brought forward, what their timeline looks like. And then take the long view and say, if you believed that someone walking into the fitting room wearing a red shirt and putting it on, that it would be useful for the retailer to be able to show them on a smart mirror what that same shirt would look like in green or yellow or some other color, and then be able to pop up some kind of advertisement for pants that might go well with that shirt -- I mean, there are just so many different ways beyond inventory management that RFID could excite shoppers and build brand loyalty.

Lewis: Some I can't help but think about, Todd, looking at a company that makes essentially hardware, but components too, is that it hasn't always been a great place to be as a business. You look at consumer tech -- there are a lot of hardware companies out there that haven't panned out. Margins can be tough to maintain at a hardware business. How do they look in this space? And is there the worry that there might be other people who can come in and undercut them?

Campbell: Yes. [laughs]

Lewis: [laughs] Simple, right?

Campbell: Yeah, absolutely. The tags themselves, we're talking about pennies on the dollar. It's going to come down to functionality and cost. So the more technology you can pack into that, maybe you can charge a little bit more in premium pricing. That's where the software that reads these tags is going to come in handy, in trying to differentiate between just, say, getting a dumb tag and something that's a little bit more of an intelligent tag.

It's going to be interesting, too, to see how this progresses, because you could have companies that incorporate things like near-field communication to add additional value after the purchase is made, and the person is actually at home and interacting with technology around them. You have the potential to print these tags with some sort of biodegradable ink, or actually embed them in fabric during the whole manufacturing process. And whoever does that first, theoretically, could be disruptive to that industry and affect pricing and market share.

So, yeah, although RFID has been around for a while, I think we're finally at a point now where we're seeing real-case usage ways that could really ignite its growth. And with that, you're going to get a lot of different competitive pushes and pulls.

Lewis: With the companies that we talk about today, it seems Impinj, both because of its size -- I think it's an $850 million company -- and because of the space that it operates in, probably one of the riskier companies that we're looking at today.

Campbell: I think that's fair to say. Reward and risk. We have the potential -- apparel alone is an 80 billion-tag market opportunity. That's 10 times the forecasted number of tags that Impinj is going to sell this year. So yes, there's a huge market opportunity. With that comes a huge risk that someone else is going to go in there and innovate or undercut. But I think it's definitely a stock that should be on people's radar.

Dylan Lewis has no position in any of the stocks mentioned. Todd Campbell owns shares of Impinj. The Motley Fool recommends Impinj. The Motley Fool has a disclosure policy.