Impinj: Expanding Product Offering To Grow Market Share (NASDAQ:PI)

The share price of Impinj, Inc. (NASDAQ:PI), a leading RAIN RFID provider and a renowned pioneer of the Internet of Things (IOT) has risen 56.73% (YoY) and 235.7% from its 52-week low of $39.74. There was a positive market reaction after the company announced that it expected its Q4 2022 revenue would exceed expectations by $76 million above its prior guidance of $71.5 million to $73.5 million. Fourth quarter and FY 2022 financial results for Impinj are set to be released on February 8, 2023.

Thesis

Impinj added two novel RAIN RFID tag chips, the Impinj M780 and M781 into 2023 whose product identifiers will help manufacturers meet regulatory compliance. As part of its drive to advance its M700 chip series, these new tag chips are embedded with a large user memory to help store product-specific information, lower wastage, and increase shelf-life. Additionally, the company expects increased demand from its end users and go-to-market partners into 2023 due to new deployments such as the endpoint IC supply. However, PI is still grappling with component supply shortfalls that may eat into systems revenue growth in the near term.

Impinj outperformed some of its peers in the semiconductor industry with the SPDR S&P Semiconductor ETF (XSD) down 14.04% (YoY). XSD tracks the performance of US-based chip and IT companies and it rose to an all-time high of $220.31 early in Q1 2022. Among the companies in this basket, Lattice Semiconductor Corp (LSCC) rose 19.18% (YoY), QUALCOMM Incorporated (QCOM) lost 31.83% (YoY), and Qorvo, Inc. (QRVO) is down 30.28% (YoY) while Wolfspeed, Inc. (WOLF) dropped 20.96% (YoY). The cyclical nature of the semiconductor industry has put pressure on major chip names with supply shortages taking a toll on demand expectations.

Impinj managed to leverage tight supply concerns to raise its revenue by 51.06% (Y/Y) beating estimates by $3.52 million. PI’s EPS stood at $0.34, also beating Wall Street estimates by $0.17 in the quarter. In its Q3 2022 earnings report, Impinj noted that revenue from its endpoint Integrated Circuits (ICs) exceeded expectations. These ICs consist of the M700 series that include M730, M750, M770, and M775. At the time of the report, the company had not released the new M780 and M781 ICs. The company prides itself that it was able to sell through its partners billions of endpoint ICs for pennies a piece.

Other revenue sources include system sales software, thousands of gateways sold for $1,000 a piece, tens of thousands of readers sold for $100 apiece and millions of reader ICs sold for $10 apiece. Impinj has supported connectivity to more than 60 billion products to date (with the help of its partners) to enable timely derivation of information through the wireless connection.

M780 and M781 chips

Chips as we know are the heart of RFID, and these latest additions come in as the next-generation components in the industry. These RAIN RFID tag chips possess more memory than the M700 series and have been specifically designed for medical, food, and industrial manufacturing. The M780 has 496-bit Electronic Product Code (EPC) memory and 128-bit user memory. This memory format is a step up from the earlier M700 series that only offered 96-bit user and 128-bit user memory. Impinj M781 chip also has 128-bit user memory and 512-bit user memory. Expansion of the memory format allows the chip to capture data such as batch/IoT, date of production/ expiration, and weight.

In addition to these new chips, the company also announced a new reference-design portfolio dubbed Impinj Core3D Antenna. This reference design helps the existing Impinj M700 series chips to conduct an omnidirectional reading. In retrospect, RFID tag chips that are being read from the rear can be read from any direction regardless of the orientation of the RFID inlay. Other antennas are linear polarized and only read from one particular plane. The Core3D Antenna will in the end improve system readability and accuracy by simplifying tag and inlay development. Before this development, RFID users had to adopt a circularly polarized antenna which in my view cannot work as efficiently as the Core3D Antenna.

Another important feature of the 496-bit user M780 is that it allows for at least 124 Hex characters to be encoded in the RFID tag. This addition is also a step up from the earlier versions that only had 24 and 32 characters encoded in the RFID tag.

The M781 RFID has 128-bit for the EPC and 512-bit memory for the user. It will be up to the application in use to determine if more memory will be needed in the User of EPC. These two facets have different information that can be retrieved to allow accurate information tracing such as batch number or product manufacture dates. What Impinj has done is to cater both sets of users, that is those in need of more EPC memory will adopt M780 while those in need of more user memory will adopt M781.

Market dynamics

The global RAIN RFID market was valued at the upside of $3 billion in 2021. At the time, tag IC unit shipments stood at 28.9 billion units. Finished tag/ transponder units in 2021 reached 27.7 billion units while reader shipments were more than 261,000 units. In my view, I believe close to 40 billion RFID tags were used in 2022 due to their low-cost nature. It is getting more interesting with Impinj even adopting the use of RFID in tire tracking systems. This improvement stems from the fact that manufacturers have long used RAIN RFID tags to track commercial trucks and farming tires. When it comes to consumables that total trillions per year, only 0.3% of these connectable items are believed to be connected.

Impinj expects to have more orders into 2023 especially due to the demand for E-family products. The company commenced Q4 2022 with a significant portion of the system backlog with Reader and gateway revenue meeting the company’s expectations.

Among the new introductions for PI into 2023 include the Impinj 775 which doubles up as a new endpoint IC. It pairs with an “ISO standardized cryptography engine” containing a unique key in every IC. PI’s reader ICs also have new firmware supporting challenge-response dialog with the endpoint ICs. There is also the Impinj Authentication Service enabling the verification of ICs in speeds of milliseconds. This service prevents counterfeits by only authorizing authenticated endpoint ICs, enhancing safety and securing the supply chain.

Risks to Consider

Impinj realized a decrease in gateway revenue even as reader revenue remained flat in the third quarter of 2022. The company decried increasing costs of endpoint ICs as well as systems with vendors and subcontractors signaling future price increases. Cost of revenues gained 38.7% (Y/Y) to $30.8 million with total operating expenses gaining 10.7% (Y/Y) to $39.2 million. The increase in these costs made Impinj record a net loss of $2.2 million in the quarter. However, this loss signaled an 80% (QoQ) increase from a loss of $11.5 million recorded in Q2 2022. The increase in costs may eventually force Impinj to pass the costs to its customers which may lead them to choose competitors’ products thereby affecting product margins.

Supply chain headwinds continue to rock the chip industry. Impinj admitted in its 10-Q that it faced a silicon wafer shortage. Silicon is the main component material that is used in manufacturing the microchip of an RFID transponder. Further, it is not just silicon, Impinj noted that it was facing a general component shortfall that even constrained the shipment of readers in the quarter. This shortage has affected the production endpoint ICs which forced Impinj to enter Q4 2022 with a significant backlog of system production. At the onset, this backlog shows business progression but a significant level fairly indicates the company is undergoing a major component shortage.

Bottom Line

As a growth-focused investor, I have tracked PI’s progress and the stock is trading just 6.7% below its 52-week high of $137.13. The stock is not cheap, but I believe that the share price will surpass this level by the time it announces its Q4 2022 and FY 2022 earnings in February 2023. Despite the supply-side component constraints, Impinj has managed to record more than 50% (Y/Y) growth in Q3 2022 sales. This increase is commendable considering the company is introducing new chips to cover a larger untapped market share. I expect the company to encounter a significant demand in 2023. I, therefore, recommend a buy rating for this stock.