Impinj's (NASDAQ:PI) stock recently rallied after the RFID (radio frequency identification) chipmaker posted its first-quarter earnings report. Its revenue rose 45% annually to $47.8 million, beating estimates by $9.4 million.

Impinj's GAAP net loss narrowed from $7.1 million to $4.3 million. On a non-GAAP basis, it posted a profit of $2.9 million, compared to a loss of $2.4 million a year earlier. Its non-GAAP EPS of $0.13 also easily beat expectations by $0.18.

An RFID tag with a barcode.

Image source: Getty Images.

Impinj's growth during the quarter, which ended on March 31, indicated that demand for its RFID chips and readers -- which are frequently used by retailers and suppliers to track inventories -- remained strong throughout the COVID-19 crisis. It also indicated that Impinj remained resilient throughout the retail apocalypse and pandemic-related store closures.

In fact, Impinj benefits from the mounting pressure on retailers to track their inventories and customer habits more effectively to widen their moats against mass retailers like Amazon, Walmart, and Target. Does that paradigm shift make Impinj a great long-term investment?

How fast is Impinj growing?

Impinj generated 70% of its revenue from endpoint ICs (RFID chips) in the first quarter. The remaining 30% came from its systems business, which sells card readers and software for processing those chips. Its RFID chip sales rose 54% annually during the quarter as it system sales grew 26%.

Impinj's revenue growth accelerated significantly from its previous quarters, but its non-GAAP gross margin contracted sequentially and annually:

Metric

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Revenue Growth (Year Over Year)

31.9%

33.8%

18.5%

17.9%

44.6%

Non-GAAP Gross Margin

50%

50%

50.2%

50.6%

46.1%

Source: Quarterly reports.

Impinj attributed that decline to a high expense from dealing with excess and obsolete inventories in Europe. Demand for certain RFID chips, which were optimized for European retail applications on an older frequency band, declined as the pandemic spread across the region, and the shift toward a newer frequency band is rendering the older chips obsolete. Impinj is getting rid of those older chips, and will sell its newer M700 chips -- which are optimized for the new band -- when the European retail markets rebound.

Excluding the E&O charge, Impinj's gross margin would have expanded 110 basis points annually. It also doesn't expect to incur another significant E&O charge in the second quarter -- which suggests the one-time disruption has passed. Moreover, many European retailers are gradually reopening their stores, so orders for its newer M700 chips could accelerate significantly throughout the rest of the year.

Impinj declined to provide exact guidance for the second quarter, citing "significant uncertainties" in the market, but CEO Chris Diorio noted that "despite the prevailing sentiment in many of our end markets being negative, there are bright spots as well, such as in omnichannel retail and supply chain and logistics."

Limited competition and a strong cash position

Impinj's biggest competitor in the RFID market is NXP Semiconductors (NASDAQ:NXPI). NXP produces a broad range of chips for the automotive, industrial, IoT (Internet of Things), mobile, and communications infrastructure markets, so RFID chips only generate a small percentage of its total revenue.

RFID chips and tags.

Image source: Getty Images.

NXP's superior scale could threaten Impinj's growth, but Impinj already has plenty of major customers, including NASA, Volvo, appliance maker Haier, apparel retailers Undiz and La Chapelle, and a growing list of hospitals and international airports. In other words, there could be plenty of room for both Impinj and NXP to expand their RFID businesses without trampling each other.

During the conference call, Diorio noted that retail apparel consumed "more than half" of all RFID chips worldwide, and that retailers that tethered their inventories to RFID systems were "better positioned to sell online than their competitors who are not," and that disparity would boost market demand over "the long term."

Diorio pointed out that throughout the COVID-19 closures, "visionary retailers and brands that have deployed RAIN (passive battery-free RFID) systems are well situated to match online orders to product anywhere in their supply chain and then ship from store."

Impinj's cash, cash equivalents, and investments rose 2% annually to $119.2 million, and it generated a free cash flow of $700,000 as its long-term debt rose just 2% to $51.8 million. Impinj has plenty of liquidity to weather the near-term challenges, and it will likely benefit from sweeping technological upgrades at aging retailers.

The bottom line

Impinj remains a great way to invest in the growing RFID market and the turbulent retail apocalypse, and the stock isn't expensive at less than four times this year's revenue estimate. It still isn't profitable on a GAAP basis, but this small-cap stock could surprise investors with big returns over the next few years.