Many industries use radio-frequency identification (RFID) tags to track objects. Retailers use RFID tags to track inventories and consumer shopping trends, companies use them in security passes, and logistics companies use them to track cargo. That's why the global RFID market is projected to grow at a compound annual growth rate of 7.4% between 2017 and 2025 into a $31.9 billion market, according to Kenneth Research.

The growth of that market could benefit Impinj (NASDAQ:PI) and NXP Semiconductors (NASDAQ:NXPI). Impinj is a small-cap company that sells RFID chips and their accompanying readers and services. NXP, one of Europe's largest chipmakers, sells RFID chips and devices through its Internet of Things (IoT) unit.

An RFID tag.

Image source: Getty Images.

Impinj notably sued NXP over patent infringement claims regarding its RFID technologies earlier this year, and NXP subsequently counter-sued with similar claims.

Both cases remain unresolved, but Impinj's stock rallied nearly 90% this year as it dazzled investors with a year-long streak of double-digit revenue growth. NXP's stock also rose nearly 80% this year as its cyclical declines in the automotive, industrial and IoT, and mobile sectors seemed to bottom out.

Those gains were impressive, but past performance never guarantees future gains. Let's take a closer look at both stocks to see if one has more upside potential.

Which company is growing faster?

At first glance, Impinj's numbers look much better than NXP's. Impinj posted double-digit revenue growth for four straight quarters, while NXP's revenue declined throughout the same period:

YOY revenue growth*

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Impinj

5.5%

28.9%

31.9%

33.8%

18.5%

NXP Semiconductors

2.4%

(2.2%)

(7.8%)

(3.2%)

(7.4%)

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

Impinj generated 65% of its revenue from RFID chips last quarter, and the rest from sales of systems like readers, gateways, modules, and software. Its growth remained robust over the past year, thanks to the growing adoption of RFID tags among retailers.

NXP generated 46% of its revenue from auto chips last quarter. Another 19% came from industrial and IoT chips, 14% from mobile chips, and 21% from communication, infrastructure, and other types of chips. It attributed its year-long slowdown to macro headwinds battering the automotive, industrial, and service provider sectors.

Slowing growth vs. a cyclical rebound

However, Impinj's growth is decelerating as NXP's declines bottom out. Impinj expects its revenue to rise just 10% annually in the fourth quarter. Analysts expect its revenue to rise 22% this year but dip to just 14% growth next year. Impinj attributed that slowdown to "seasonally" lower orders of RFID chips, but competition from NXP could also be a headwind.

A network of IoT connections emerging from a man's finger.

Image source: Getty Images.

NXP expects its revenue to dip 6% annually, but remain flat sequentially, in the fourth quarter. That rebound indicates that the macro headwinds facing NXP are finally fading.

Moreover, NXP's pending acquisition of Marvell Technology's (NASDAQ:MRVL) wireless connectivity portfolio -- which is set to close in early 2020 -- should amplify that recovery by boosting its annual revenue by about 3%. Analysts expect NXP's revenue to dip 6% this year, but rebound 5% next year as it absorbs Marvell's business.

The margins and valuations

Impinj's gross margin improved annually and sequentially last quarter, but NXP's margin expanded at a slightly more impressive rate as its pricing power improved:

Gross margin

Q3 2018

Q2 2019

Q3 2019

Impinj

50%

50%

50.2%

NXP Semiconductor

53%

53.3%

53.7%

Non-GAAP. Source: Company quarterly reports.

Impinj isn't consistently profitable on a GAAP basis, due to high stock-based compensation expenses. But on a non-GAAP basis, it's expected to post a slim profit this year followed by four-fold growth next year. The stock isn't cheap at nearly 700 times forward earnings, but that multiple could decline quickly as Impinj's profitability improves.

NXP is consistently profitable by both GAAP and non-GAAP measures. Analysts expect its non-GAAP earnings to grow 7% this year and 10% next year, which are solid growth rates for a stock that trades at 15 times forward earnings. NXP also pays a forward dividend yield of 1.2%, while Impinj doesn't pay a dividend.

The winner: NXP

Impinj is still a solid growth stock and a great "pure play" on the RFID market. But with the market currently hovering near historic highs, I prefer sticking with NXP because it has a better-diversified business and a lower valuation, and is better poised for a cyclical rebound.