Shares of Impinj (NASDAQ:PI) recently plunged after the RFID (radio frequency identification) chipmaker posted its fourth-quarter earnings. The decline was surprising, since Impinj beat analysts' estimates and offered a strong forecast for the first quarter.

Impinj's revenue rose 18% annually to $40.8 million, beating estimates by $2.7 million. It generated a non-GAAP net profit of $775 million, versus a loss of $1.54 billion a year earlier, as its EPS of $0.03 cleared expectations by two cents.

For the first quarter, Impinj expects its revenue to rise 12%-24% annually, and for its non-GAAP EPS to come in between a loss of $0.11 and a profit of $0.02. Both forecasts surpassed analysts' expectations for 9% revenue growth and a loss of $0.09 per share.

RFID chips being manufactured.

Image source: Getty Images.

So was Impinj unfairly punished as the coronavirus crisis and the Fed's emergency rate cut battered the broader market? Let's dig deeper into Impinj's latest report to decide.

Decelerating revenue growth with expanding margins

Impinj reports its revenue in two segments: endpoint ICs (integrated circuits), or RFID chips; and systems, which include card readers and software for processing RFID chips.

Impinj's sales of endpoint ICs, which accounted for 64% of its top line, rose 15% to $97.7 million in 2019. Its system sales, which accounted for the rest, rose 47% to $55.2 million. The growth of its higher-margin system segment gradually boosted its gross margins throughout the year, even as its revenue growth decelerated:

Period

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Year-over-year revenue growth

28.9%

31.9%

33.8%

18.5%

17.9%

Non-GAAP gross margin

49%

50%

50%

50.2%

50.6%

Source: Quarterly reports.

The Asia Pacific region accounted for over 59% of Impinj's revenue in 2019, followed by the Americas at nearly 35% and Europe, the Middle East, and Africa at almost 7%.

Its sales in Asia and the Americas grew 12% and 74%, respectively, as retailers aggressively tagged items with RFID chips to track consumer purchases and streamline their supply chains. That growth offset a 17% decline in Europe, the Middle East, and Africa, where retailers deployed fewer systems. Competition from Dutch chipmaker NXP Semiconductors (NASDAQ:NXPI) could also be exacerbating that pressure in several markets.

Expect a slowdown in 2020

The midpoint of Impinj's revenue guidance (for 18% growth) implies that its revenue growth should remain stable.

A bar code and an RFID tag.

Image source: Getty Images.

During the conference call, CFO Cary Baker stated that the company's first-quarter revenue and gross margin are typically weighed down by annual pricing negotiations and lower system sales, but noted that its North American systems project -- which boosted its sales in the fourth quarter -- would contribute "meaningful" revenue in the first quarter.

Baker noted that the project would transition from its deployment phase, which generates higher revenue from customers installing the hardware, to the operations phase, which generates lower recurring revenue from software and subscriptions, by the second quarter.

Baker warns the transition will represent a "meaningful headwind" for the systems business starting in the second quarter. The slowdown in that higher-growth, higher-margin business, along with the price negotiations for endpoint ICs, will likely reduce Impinj's gross margins throughout the rest of 2020. Baker also warned that higher payroll taxes and healthcare costs could dent its operating margins in the first quarter.

Impinj doesn't disclose its revenue from China separately, but CEO Chris Diorio noted that the impact from the coronavirus had been "modest to date." Diorio stated that the outbreak had delayed the ramp-up of its new M700 series chips by "more than a month," but that it was still on track to fulfill its orders by the end of the second quarter, and that the product line would still "positively impact" its business in 2020.

Can Impinj still justify its premium valuations?

Impinj's core business remains broadly stable, but it expects decelerating revenue growth and contracting margins in 2020. That's why analysts expect its revenue to rise just 12% to $172 million this year as its non-GAAP earnings stay flat at $0.04 per share.

But at $25, Impinj trades at more than 600 times forward earnings and nearly five times this year's revenue. Those valuations are frothy, so investors who want exposure to the RFID market might simply buy NXP -- which trades at just 14 times forward earnings -- instead.

Impinj is still a "best in breed" play on the smart retail market, but investors should wait for the stock's valuations to cool off a bit before buying the stock.