NXP Semiconductors (NASDAQ:NXPI) and Impinj (NASDAQ:PI) might not initially seem like direct competitors. NXP produces a wide range of automotive, communications infrastructure, and mobile chips, while Impinj sells RFID (radio frequency identification) chips for tracking products.

But NXP also sells RFID chips, and the two companies have been suing each other over the past year over alleged patent violations. Those cases haven't been resolved yet, but they highlight a brewing "David vs. Goliath" clash between Impinj, which is worth less than $1 billion, and NXP, a $44 billion chipmaking giant.

Will Impinj continue growing in NXP's shadow, or will competition from its larger rival and other macro headwinds keep the bulls away? Let's dig deeper into these two companies to find out.

A visualization of wireless connections across a city.

Image source: Getty Images.

How do Impinj and NXP make money?

Impinj sells RFID chips, card readers, and software. It generated 72% of its revenue from those chips (endpoint ICs) in the first nine months of 2020. The remaining 28% came from its systems segment, which sells card readers, software, and other related services.

Retailers account for a "significant portion" of Impini's sales, according to its latest 10-Q filing, since stores use its RFID chips to track inventories and sales trends. Many retailers have ramped up their usage of RFID chips in recent years to optimize their businesses, identify strengths and weaknesses, and track their digital orders to counter e-commerce giants like Amazon.

NXP generated 43% of its revenue from the automotive market in the first nine months of 2020. Its industrial and IoT (Internet of Things) segment generated 22% of its revenue, the communications infrastructure and other segment generated another 21%, and the remaining 14% came from mobile chips. Its RFID chips generate an undisclosed sliver of its communications infrastructure and other revenue.

Last December, NXP acquired Marvell's wireless and bluetooth portfolio for $1.7 billion. It integrated those assets into its industrial, IoT, auto, and communication segments. Earlier this year, it divested its voice and audio solutions assets for $161 million.

Impinj and NXP both face pandemic-related headwinds

Impinj struggled during the COVID-19 crisis as many retailers closed their stores. It partly offset that slowdown with stable sales of RFID chips for the industrial, supply chain, and specialty application markets, but its revenue still fell 9% year-over-year to $102.5 million in the first nine months of the year.

Its endpoint IC sales grew 3% during that period, but its system sales plunged 28%. Its gross margin also declined year-over-year from 48.3% to 46.6%. It attributed that decline to its sluggish revenue growth, a higher mix of lower-margin products, and excess inventories in Europe, where a new frequency band rendered some of its older products obsolete. Its net loss widened from $15.3 million to $36.2 million.

Impinj expects its revenue to decline 14%-16% for the full year, and for its net loss per share to nearly double. But next year, analysts expect Impinj's revenue to rise 12% with a narrower loss as the pandemic passes. The competitive and legal threats from NXP won't wane anytime soon, but many big customers -- including Volvo, Cisco, and NASA -- already use Impinj's chips and systems.

Designers study an augmented reality vehicle.

Image source: Getty Images.

NXP's core automotive business hit a brick wall this year as automakers halted the production of new vehicles during the pandemic. Its auto revenue fell 16% year-over-year in the first nine months of the year, outpacing the single-digit declines at its mobile and communications infrastructure segments and wiping out the growth of its industrial and IoT unit.

NXP's total revenue declined 7% year-over-year to $6.1 billion during that period, its gross margin dropped from 51.8% to 48.3% due to a higher mix of lower-margin chips, and it posted a net loss of $257 million -- compared to a profit of $129 million a year ago.

NXP expects its revenue to decline about 4% for the full year, while analysts expect its adjusted profit -- which excludes its recent acquisitions, divestments, and stock-based compensation -- to decline 20%. Next year, they expect its revenue and adjusted earnings to rise 13% and 34%, respectively, as the auto sector recovers, industrial customers resume their IoT upgrades, carriers upgrade their networks, and sales of mobile devices accelerate again.

The valuations and verdict

Impinj's stock trades at about six times next year's sales, which isn't particularly cheap, but its sales improved sequentially in the third quarter and should continue accelerating as more businesses reopen.

NXP trades at less than five times next year's sales and 19 times forward earnings. Its sales also grew sequentially in the third quarter, and the headwinds in its core markets could dissipate quickly after the pandemic ends. It also pays a forward dividend yield of nearly 1%.

I still like Impinj as a speculative small-cap play, since demand for its RFID products should climb over the long term and make it a lucrative takeover target for big chipmakers like NXP. But for now, NXP's stronger growth, better diversification, superior scale, lower valuation, and dividend all make it a more compelling investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.