The Internet of Things (IoT), which connects myriad devices to each other and the cloud, could link up to 41.6 billion devices by 2025, according to IDC. Two component makers that could benefit from that market's growth are Impinj (NASDAQ:PI) and Texas Instruments (NASDAQ:TXN).

Impinj produces radio-frequency identification (RFID) chips, readers, and software that gather large amounts of data from tagged objects. Texas Instruments produces various analog, embedded, and other chips for a wide range of industries. Most of TI's growth comes from the automotive and industrial sectors, which require more chips for connected cars and smart factories.

Impinj's stock surged 130% this year as the company impressed investors with its robust revenue growth and improving profitability. TI's stock only rose about 25% as the chipmaker struggled with macroeconomic issues across most of its key sectors. Let's dig deeper and see if Impinj will continue to outperform TI.

Networking connections across a city.

Image source: Getty Images.

Understanding Impinj and TI's businesses

Impinj splits its business into two divisions: RFID chips, officially referred to as "endpoint ICs" (integrated circuits); and systems, which include the reader ICs, readers, gateways, modules, and software used to process the RFID chips.

Impinj generated 65% of its revenue from endpoint ICs last quarter. The remaining 35% came from its system sales. Its endpoint IC revenue rose 11% annually and its system revenue grew 35%. Impinj attributes its growth to the rising adoption of RFID tags among retailers, which are tagging more products to digitally track inventories and shopping trends.

A close-up of an RFID chip and a barcode.

Image source: Getty Images.

Texas Instruments splits its business into three main divisions: analog chips, which include power, signal chain, and high-volume chips; embedded chips, which include connected microcontrollers and processors; and "other" chips, which include digital light processing (DLP) chipsets and custom application-specific integrated circuits (ASIC).

Analog chips accounted for 71% of TI's revenue last quarter. Embedded accounted for 19% of its revenue, and the remaining 10% came from "other" chips. Its analog revenue fell 8% annually during the quarter, while its embedded and other revenue both declined by 19%. TI attributed its slowdown to macro issues like the U.S.-China trade war and Brexit throttling demand from all its "major customers, regions, and technologies."

Which company has a brighter outlook?

During last quarter's conference call, Impinj CEO Chris Diorio stated that retail adoption of its RFID chips continued to grow "despite macro and trade uncertainties." That view, which was also expressed in previous quarters, indicates that retailers consider RFID tags to be a necessary expense, regardless of tariffs or the trade war. That's why Impinj consistently generated double-digit revenue growth with rock-solid gross margins over the past year.

Impinj

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

YOY revenue growth

5.5%

28.9%

31.9%

33.8%

18.5%

Gross margin*

50%

49%

50%

50%

50.2%

YOY = Year-over-year. *Non-GAAP. Source: Impinj quarterly reports.

Impinj expects its revenue to rise by 10% (at the midpoint) in the fourth quarter. Analysts expect its revenue to rise 22% this year and 15% next year.

Texas Instruments' streak of positive revenue growth ended in the third quarter of 2018. However, its gross margins held steady thanks to the shift of its analog chip production from the 200mm manufacturing process to the less capital-intensive 300mm process.

Texas Instruments

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

YOY revenue growth

3.5%

(0.9%)

(5.2%)

(8.7%)

(11.5%)

Gross margin

65.8%

64.8%

62.9%

64.3%

64.9%

YOY = Year-over-year. Source: TI quarterly reports.

Texas Instruments' stable margins indicate that it isn't losing any pricing power, and that its problems are mainly cyclical. Unfortunately, TI expects the macro pain to continue with a 14% revenue decline (at the midpoint) in the fourth quarter. Wall Street expects its revenue to drop 10% this year and another 1% next year.

Earnings growth and valuations

Impinj hasn't been consistently profitable on a GAAP basis in the past, mainly due to its high stock-based compensation expenses. However, it's remained profitable on a non-GAAP basis, which excludes those charges, over the past two quarters. It expects that streak to continue into the fourth quarter.

Impinj's lack of consistent profits makes it tough to properly value. It trades at about four times next year's sales, which is a reasonable P/S ratio relative to its growth, but it isn't particularly cheap relative to other growth stocks.

TI remains consistently profitable and remains dedicated to returning "all" of its free cash flow to investors via buybacks and dividends. But it expects a 21% earnings decline in the fourth quarter, and analysts expect its earnings to drop 8% this year and another 2% next year, which are mediocre growth rates for a stock that trades at 24 times forward earnings.

The winner: Impinj

Texas Instruments is still a solid long-term investment, but Impinj generates stronger growth, isn't heavily exposed to macro headwinds, and is a more focused play on the IoT rush than TI. Impinj's stock looks a bit frothy, but growth-oriented investors could consider accumulating some shares.