Trade Alert: The tiniest but biggest revolution ever?

I’m adding a new small cap stock to the portfolio, one that comes with plenty of risk but which could end up creating a huge new Revolutionary Platform. Impinj, PI, went public on July 26, 2016 and Q3 2016 will be the first quarter where the company’s financials will be reported after the IPO.

The company is a leader in the RAIN RFID industry — think Internet of Things on a scale you never realized before. What is RAIN RFID? Essentially, it’s the idea that you can put a tiny Internet-enabled tag or print on any item anywhere and  be able to scan that item without having to touch it or see it. Every pair of shorts, shoes and gloves that Nike makes, for example, will eventually have RAIN RFID tags on them which will enable an entirely new level of productivity and efficiency throughout the distribution chain. Every set of shoestrings and textile that goes into the supply chain of the Nike shoes will also have RAIN RFID tags on them.

A leader in developing radio frequency technology, or RFID chips, Impinj has found unique partnerships with Coca-Cola, Macy’s, McDonald’s and other corporations who embed these tiny sand-size chips in anything from receipts to product packaging.

Here’s some more information the RAIN RFID Alliance Organization’s website:

RAIN RFID Tags

• Are either attached to or embedded in items
• Tagged items store and send information
• Thousands can be identified simultaneously and do not have to be visible

RAIN RFID Readers

• Have antenna(s) for either short or long range communication
• Can be small and portable, or larger and installed, or embedded in other devices

RAIN RFID Software Applications

• Identify – Locate – Authenticate – Engage
• Use the tags and readers to create, collect, and use the item’s data – locally, or on a server, or on a cloud
• Authentication starts with the origin and history of each item
• Engage can involve sensors, or other means of interacting with the item

——

So Impinj is trying to become the de facto standard platform for the commercial application of these RAIN RFIDs. It’s a huge undertaking and if the company fails to become a de facto standard the profits in years ahead could slim. On the other hand, if the company succeeds in becoming a de facto standard with trillions of items and millions of companies using its platform, the stock would likely be up 10-50-fold from these levels.

Remember that the stock is a small cap, with a market cap of only $600 million, making it 1/1000th the size of Apple for example.

The company is based in Washington state and claims they have a 65 percent market share for passive UHF RFID tag chips compliant with the EPC Gen 2 RFID standard, which Impinj refers to as the RAIN standard. The firm estimated that approximately 70 percent of unit volume of fixed readers use its reader chips, as do “the majority of handheld readers,” and further claimed to have sold 13 billion tag ICs to date.

The company seems to be highly dynamic and a leader (with 60%+ market share – according to the company) in what should be a growing industry

Image Source: http://www.secinfo.com/d14D5a.wJScj.htm

Quote From The Prospectus: “We believe our market opportunity is massive. Not only are the numbers of tagged items large and growing but so is the infrastructure, in both scale and investment, that produces, encodes, applies, reads and extracts business value from these tagged items. According to industry research, RAIN tag IC volumes grew at a 27% compound annual growth rate, or CAGR, from 2010 to 2015, reaching 5.3 billion in 2015 and are expected to grow to over 20 billion in 2020. Our addressable market in the two largest RAIN opportunities, retail and healthcare, is large and growing. Frost & Sullivan, a market research firm, forecasts the retail opportunity will grow at a 39% CAGR between 2014 and 2020, reaching $5.4 billion by 2020. Transparency Market Research, another market research firm, forecasts the healthcare opportunity will grow at a 14% CAGR between 2014 and 2020, reaching $5.3 billion by 2020. We have additional opportunities in automotive, industrial and manufacturing, consumer experience, government, food, datacenter, travel and banking.”

The opportunity for significant sales growth seems to be substantial, with analysts forecasting significant sales growth in 2016 (+34.3% YOY) and through 2020. Analysts’ estimate sales will reach $227 million in 2020, up nearly 150% from $90.9 million over the last twelve months

There’s the possibility that PI will be able to benefit from economies of scale and see its margins grow along with sales. If this turns out to be the case we will likely see a significant increase in PI’s price, given that it will be able to become solidly profitable and reinvest in its own growth. A good sign is that PI has been getting closer to consistent profitability over time

The market may already be factoring in a lot of growth into PI’s current price, because PI is currently trading at approximately 5.8x consensus 2016 sales estimates. That’s not “cheap” but not terribly expensive for a company with this kind of potential growth ahead.

I found the following quote from the IPO Prospectus a bit concerning: “RAIN market adoption has historically been slower than anticipated or forecasted by us and industry sources.” I think it’s likely that some of the huge 25%+ sales volume growth estimates for 2016-2020 could be a bit high, which concerns me given that analysts’ estimates call for 17-34% YOY sales growth in each year from 2016 to 2020.
Ability to leverage economies of scale is questionable, and without a long history as a publicly-traded company it is risky to bet on. It is unclear how PI will operate as a public company, because it doesn’t even have 1 quarter as a publicly-traded company under its belt. In addition, investors and analysts are expecting this company to become solidly profitable in 2016 and beyond and anything that stops/delays this from happening could cause a substantial selloff in the company’s stock price. First earnings report as a publicly-traded company is on November 15, 2016.

I’m adding Impinj to the Revolution Investing model portfolio today. I’m personally starting with a ⅓-sized tranche today and will look to scale into more of this name in weeks ahead.