Is Impinj a Buy?

Radio frequency identification (RFID) company Impinj (PI 3.40%) is up 108.4% so far in 2019 as the company has returned to growth mode after a couple years of downturn. The endpoint and asset tracking technology it employs is growing in use, and a world that is steadily becoming more connected should be a long-term boost for Impinj.

It's important to bear in mind, though, that Impinj is a manufacturer and will be subject to swings in supply and demand, as any product sales company is. That can make for a somewhat volatile stock that set-it-and-forget-it investors may not find appealing.

Image source: Getty Images.

Understanding the revenue trend

Impinj makes RFID tags, software, and systems enabling companies to automate the scanning and tracking process for assets in transit. There are a myriad of use cases -- from supply chain and logistics companies using the tags to keep inventory moving toward its final destination to retailers using RFID to track inventory and understand shopping trends.  

As organizations update their operations for a connected world in which internet and network access are omnipresent, demand for Impinj's RFID tags and systems is on the rise. Since it went public in 2016, total revenues are up nearly 40%. However, tracking tags are a cyclical affair, ebbing and flowing depending on inventory levels for Impinj's customers. After getting off to a hot start its first year as a public concern, Impinj experienced falling sales as it worked through an oversupply of inventory.

Data source: Impinj. YOY = year over year. 

The ups and downs for the business are driven from the sale of RFID chips themselves, Impinj's largest segment at 64% of revenue through the first half of 2019. Systems sales -- sales of chip readers and software -- are a more stable source of revenue. The highly variable component in the chip side of the business has led to some equally big moves for operating profit margin (which is still negative over the last 12 months) and free cash flow (cash left over after operating and capital expenses are paid for).  

Data by YCharts.

The big rally this year in sales and the bottom line is responsible for the stock more than doubling in value. Investors have been optimistic that new uses for connectivity and an eventual uptick in global economic activity will spur on Impinj's advance. A suit brought against NXP Semiconductors (NXPI 1.65%) for RFID tech patent infringement also has investors feeling positive as the prospects of a cash settlement against the chip giant could strengthen Impinj's status as an underdog with a chance. 

Improving profits but more variability ahead

It's important to remember, though, that while Impinj is up big this year, business results aren't likely to move in a straight line. In fact, guidance for the third quarter of 2019 is for revenue to increase 8% to 13% from the year prior -- a respectable figure but a sharp slowdown from the recent past. That's due to the company's already having lapped its inventory adjustment from early 2018. It's also due to the completion of a big new logistics project in North America that boosted systems sales in the first half of 2019.  

Going forward, there is plenty of opportunity for RFID to gain new traction. Impinj management has cited uses from air traffic luggage tracking to auto parts tracking as promising new areas for its product. Inventory remains far lower than it was a couple of years ago, so another correction doesn't appear to be looming, but RFID suppliers -- like many other types of chip suppliers -- can be volatile and unpredictable businesses reliant on activity from end-users.

Impinj needs sales to keep growing. As shown in the chart above, operating margins are still running negative, and free cash flow is barely in positive territory. Investors are betting that this year's double-digit advance in sales will continue for some time. But if actual results do take a breather, as management has forecast, the stock could be in for some downside.

So at this point, I'm staying away from Impinj stock. RFID is likely to continue making inroads in the business world for the indefinite future, but Impinj isn't the only game in town, and sales can be volatile. For investors not interested in stock babysitting or big price fluctuations, this one looks like a pass -- at least for the moment.