Impinj Has Some Work To Do Even Though It Has Gotten Much Better (NASDAQ:PI)

Impinj, Inc. (NASDAQ:PI) has been on a tear lately. The stock has more than doubled in value in the last three months, powered in part by better-than-expected earnings and an improved outlook. The bull case has gotten stronger with the latest developments, but there are still some things in need of fixing. Why will be covered next.

PI is running hot

Some may have been taken by surprise by the stock’s recent moves after its poor performance earlier in the year. However, PI’s comeback in recent months did not come as a surprise to everyone. For instance, a previous article from May pointed out that even though the charts looked horrible, there was reason to believe they would soon get better.

Among other things, the stock had reached a level of support going back years, paving the way for a potential rally. Other technical indicators also suggested the stock was likely due to break out of the downtrend it was in at that time. As it turned out, the stock bottomed in May, enabling a rally that saw the stock more than double in value in about three months as shown in the chart below.

Still, it’s worth pointing out that the rally was preceded by a long decline in the first five months of the year. At one point, the stock lost as much as 53% of its value. The stock has gained 134% since hitting the low in May, which means the stock is only up 9% YTD. In other words, the recent rally, despite its magnitude, has mostly recovered ground that was lost earlier in the year. Cancel out the two moves, and you are left with gains that are far less.

However, the stock is now well into overbought territory after such a huge rally, which increases the likelihood of a pullback. In addition, it’s worth mentioning that the recent rally seems to have been powered in part by short covering. According to the most recent data, short interest reached a peak of 3.5M in the middle of May, which also happens to be when the stock reached the low of the year.

Short interest has since faded with the recent rally in the stock, and it now stands at 2M, or 8.35% of the share float. This represents a decline of 42% in the last three months. It also means there is less of an opportunity for a short squeeze. This suggests that while the stock could continue to move higher, it’s probably less likely to do so at the pace seen in recent months.

Why sentiment towards PI has changed greatly

The rally in the stock and the decline in short interest suggest there has been a change in how PI is perceived. Sentiment towards PI has improved from where it used to be not that long ago. Several factors contributed to this. For instance, PI got oversold earlier in the year after losing more than half of its value. The stock was for that reason alone likely to experience a bounce, if not a rally after being down so much.

Earnings were another important factor contributing to buying sentiment, if not the most important one. Not only did PI blow past earnings expectations in its most recent earnings report, but the raised outlook was such that it encouraged buyers to step in. PI, for instance, was expected to post revenue of $55M and a non-GAAP loss of $0.03 per share in Q2.

Instead, Q2 revenue increased by 26.5% YoY to $59.8M. PI still ended up with a GAAP loss of $11.5M or $0.45 per share, but non-GAAP earnings were much better than expected at $3M or $0.11 per share. Adjusted EBITDA was $3.8M in Q2 FY2022, up from $3.3M in Q2 FY2021. The table below shows the numbers for Q2 FY2022.

Note that the GAAP number includes $10.9M in stock-based compensation expense, and the non-GAAP number does not. In addition, share dilution continued to take place. The weighted-average number of shares reached 25.4M in terms of GAAP, up from 24.1M a year ago, and 26.6M in terms of non-GAAP, up from 25.6M a year ago.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$59.796M	$53.144M	$47.268M	12.52%	26.50%
Gross margin	52.7%	54.2%	52.4%	(150bps)	30bps
Income (loss) from operations	($8.476M)	($9.315M)	(8.317M)	–	–
Net income (loss)	($11.523M)	($10.461M)	($8.906M)	–	–
EPS	($0.45)	($0.42)	($0.37)	–	–
(Non-GAAP)
Gross margin	54.7%	57.0%	54.5%	(230bps)	20bps
Adjusted EBITDA	$3.848M	$3.507M	$3.301M	9.72%	16.57%
Net income	$3.033M	$2.361M	$2.712M	28.46%	11.84%
EPS	$0.11	$0.09	$0.11	22.22%	–

Click to enlarge

Source: PI Form 8-K

The Q2 numbers were a pleasant surprise, but Q3 guidance was the real star of the show. The outlook sees PI making huge strides in terms of the top and the bottom line. Guidance calls for Q3 revenue of $63.5-65.5M, an increase of 42.7% YoY at the midpoint. The forecast sees non-GAAP EPS of $0.15-0.20, which is much better than the loss of $0.04 a year ago. PI still expects to end up with a GAAP loss, but at $0.23-0.29 a share, it is much less than a year ago.

(GAAP)	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$63.5-65.5M	$45.2M	42.70%
Net income (loss)	($6.0-7.5M)	($12.9M)	–
EPS	($0.23-0.29)	($0.53)	–
Average # shares	25.7-25.9M	24.3M	6.17%
(Non-GAAP)
Adjusted EBITDA	$5.1-6.6M	($0.4M)	–
Net income (loss)	$4.0-5.5M	($0.9M)	–
EPS	$0.15-0.20	($0.04)	–
Average # shares	26.7-26.9M	24.3M	10.29%

Click to enlarge

The numbers are getting better and PI is raising its expectations accordingly. The goal used to be breakeven in terms of adjusted EBITDA, but PI is now aiming higher. From the Q2 earnings call:

“following the 2020 COVID downturn, we were focused on getting to adjusted EBITDA breakeven. Our expectations have evolved, and our goal now is to generate adjusted EBITDA profitability. We delivered second quarter adjusted EBITDA profitability, and we’re guiding our third quarter to expanding adjusted EBITDA profitability even in a supply-constrained environment.

And even as we continue investing in our business, we remain focused on delivering that adjusted EBITDA profitability. Our next step in the cycle will be moving towards generating free cash flow.”

A transcript of the Q2 FY2022 earnings call can be found here.

Not everyone is likely to be buying into PI

Growth appears to be accelerating at PI. As a consequence, analysts have raised their earnings expectations. Consensus estimates call for revenue of $241-248M and non-GAAP EPS of $0.37-0.74 in FY2022. In comparison, PI posted revenue of $190M and non-GAAP EPS of $0.25 in FY2021. Nevertheless, there are likely to be people out there who have some reservations about PI. If they do, it probably has to do with valuations for PI.

PI may have tremendous growth potential as a supplier of RAIN RFID solutions, but that potential comes at a steep price. For instance, the stock is valued at almost 27 times book value, which some people may view as way too high for their liking. The average stock is in the mid-single digits. The table below shows the multiples PI trades at. Keep in mind that PI is in the red in terms of GAAP earnings, which is why PI does not have a P/E ratio.

	PI
Market cap	$2.47B
Enterprise value	$2.60B
Revenue (“ttm”)	$201.7M
EBITDA	($31.9M)
Trailing P/E	N/A
Forward P/E	N/A
PEG ratio	N/A
P/S	11.38
Forward P/B	26.97
EV/sales	12.35
Trailing EV/EBITDA	N/A
Forward EV/EBITDA	126.34

Click to enlarge

Source: Seeking Alpha

Investor takeaways

A big reason why the quarterly numbers have gotten much better is because PI is less supply constrained. PI is still not able to meet all the demand out there, but its ability to access additional foundry capacity is bearing fruit. Increased supply along with demand staying strong creates a solid foundation for continued growth.

PI has been able to rope in several high-profile companies like United Parcel Service (UPS) to get them to try out its solutions. The potential need for RFID among these companies is huge. Think of all the RFID tags, readers and related infrastructure needed for all the packages, apparel and other items that are shipped and need to be tracked for that reason. If some or all of these companies commit to PI, PI could very well be in the early stages of a long expansion. In terms of potential, the sky is the limit for a company like PI.

It’s tempting to be long PI, but I am still neutral on PI. PI has gone on a rally as a previous article suggested was likely, but that also means the stock is now overbought, with the price of the stock having doubled in the last three months. The stock has room to go higher, but a pullback in the near term is possible before it does. Longs may want to consider locking in profits for that reason, especially with further gains likely harder to come by with fewer shorts around in a squeeze.

Quarterly earnings have gotten better with growth accelerating, but PI is still not a truly profitable company. PI is diluting the share float, and it will likely continue to do so since it needs access to additional capital, but some may be less than pleased by the prospect of having to buy shares that are set to be diluted.

However, the biggest barrier has to be valuations. PI is expensive no matter how you slice it. Some could even argue the stock is currently overvalued with a price-to-book value in the mid-twenties, despite all the progress PI has made. PI has potential in spades, but the asking price may simply be a hurdle too high to overcome for some. Ultimately, if the asking price is no issue, then long PI is worth considering. If not, then it may be best to wait for another time.