Impinj (PI +1.67%), a leading maker of radio frequency identification (RFID) chips, readers, and software, was generating robust sales prior to the COVID-19 pandemic. Companies optimized their supply chains with its products, while retailers used them to track shipments and sales trends. Unfortunately, the pandemic disrupted supply chains and shut down many brick-and-mortar retailers worldwide in recent months, and Impinj's growth ground to a halt.
Let's assess the damage and see if Impinj's stock can start climbing again after slipping about 5% over the past 12 months.
Image source: Getty Images.
Understanding Impinj's business
Impinj generated 70% of its revenue from its RFID chips, or endpoint integrated circuits (ICs), in the first half of 2020. The remaining 30% came from its systems business, which sells card readers and software for processing those chips. Here's how its revenue and gross margins fared over the past year:
|
Period |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
33.8% |
18.5% |
17.9% |
44.6% |
(30.7%) |
|
Gross margin |
50% |
50.2% |
50.6% |
46.1% |
51.4% |
YOY = Year over year. Note: Gross margin data is non-GAAP. Source: Quarterly reports.
Impinj's gross margin dipped in the first quarter of 2020 as it dealt with excess and obsolete inventories in Europe, where a shift to a new frequency band rendered some of its older products obsolete. But excluding that charge, it would have posted a gross margin of 51.1%.
In the second quarter of 2020, Impinj's revenue plunged 31% year over year to $26.5 million as apparel retailers, one of its top endpoint IC markets, closed their stores during the pandemic. That slowdown offset its "steady" sales to the smaller industrial, supply chain, and specialty application markets. As a result, the company's total endpoint IC revenue declined 22% year over year.
Meanwhile, its systems revenue plunged 45% year over year, as its transition from initial product sales (which generate more revenue) to the operational phase in North America exacerbated the unit's declining sales.
On the bright side, Impinj's gross margin expanded from the first quarter (even after excluding the aforementioned charge in Europe) and the prior-year quarter. Unfortunately, lower revenue and higher costs weighed down its bottom line and resulted in an adjusted EBITDA loss of $5.2 million, compared to a profit of $805,000 a year earlier. On a GAAP basis, its net loss widened from $4.2 million to $17.5 million.
Still confident in secular trends
Impinj didn't provide any guidance during its last conference call in late July, but CEO Chris Diorio warned that its recoveries in the endpoint IC and system markets could be sluggish, due to the "apparent resurgence" of the pandemic, "tightened" capex budgets, and the "ongoing slowness in consumer-facing opportunities."
Image source: Getty Images.
As a result, analysts expect Impinj's revenue to decline 16% this year, with an adjusted net loss. But over the long term, Diorio believes "COVID-19 will accelerate our secular opportunities in the mid to long terms and advance our thesis of connecting and giving digital life to everything."
Specifically, Diorio expects the crisis and ongoing competition between retailers to accelerate demand for RFID-powered solutions -- including inventory tracking tools, omnichannel fulfillment platforms, anti-theft chips, touch-free self-checkout kiosks, and other modernization efforts.
Diorio believes these upgrades will "address structural inefficiencies and deliver the seamless e-commerce, online and in-store experiences their partners and customers demand." Based on those trends, analysts expect Impinj's revenue to rebound 16% next year with a narrower loss.
The valuations and the competition
Impinj's stock isn't particularly expensive at four times next year's sales, and its business could recover quickly after the pandemic ends. But it still isn't profitable yet, while its main competitor, the chipmaking giant NXP Semiconductors (NXPI +1.08%), generates consistent profits.
There could be plenty of room in the RFID market for both Impinj and NXP to expand without trampling each other, but the two companies notably sued each other last year over patent infringement claims. An escalation of that battle could curb Impinj's growth, especially if NXP bundles its RFID chips with other products from its more diversified portfolio.
Is it time to buy Impinj?
I'm still optimistic about Impinj's long-term prospects, but its near-term recovery could easily be derailed by a second wave of COVID-19 infections, which are already occurring across Europe. Therefore, I wouldn't buy Impinj's stock until the pandemic has clearly ended since it will likely suffer a few more rough quarters before its growth accelerates again.
