Impinj: Expanding Product Offerings to Grow Market Share (NASDAQ:PI)

Impinj, Inc. share price. (Nasdaq:PI), the leading RAIN RFID provider and Internet of Things (IOT) leader, was up 56.73% (yoy) and 235.7% from its 52-week low of $39.74. There was a positive market reaction after that company announce It expects its revenue for the fourth quarter of 2022 to exceed expectations by $76 million above previous guidance of $71.5 million to $73.5 million. Impinj’s fourth quarter and fiscal year 2022 financial results are scheduled to be released on February 8, 2023.

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Impinj has added two new RAIN RFID tag chips, the Impinj M780 and M781, to 2023 whose product identifiers will help manufacturers meet regulatory compliance. As part of its drive to develop its M700 series of chips, these new label chips are included with large user memory to help store product-specific information, reduce waste, and Increased lifespan. In addition, the company expects increased demand from its end users and market partners through 2023 due to new deployments such as endpoint supply IC. However, the PI is still grappling with component supply shortages that could impact Systems’ revenue growth in the near term.

Impinj has outperformed some of its peers in the semiconductor industry with its SPDR S&P Semiconductor ETF (XSD) decreased by 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 in early Q1 2022. Among the companies in this basket is Lattice Semiconductor Corp (LSCC(up 19.18% (YoY), Qualcomm Incorporated)QCOM) lost 31.83% yoy, and Qorvo, Inc. (YoY) 31.83% (YoY). (QRVO) down 30.28% (YoY) while Wolfspeed, Inc. (wolf) decreased by 20.96% (YoY). The cyclical nature of the semiconductor industry has put pressure on major chip names with supply shortages affecting demand forecasts.

Impinj was able to leverage limited supply concerns to increase its revenue by 51.06% (yoy) beating estimates by about $3.52 million. PI stock stood at $0.34, also beating Wall Street’s estimate of $0.17 in the quarter. In its Q3 2022 earnings report, Impinj indicated that revenue from endpoint integrated circuits (ICs) exceeded expectations. These integrated circuits consist of the M700 series which includes the M730, M750, M770 and M775. At the time of the report, the company had not yet released the new M780 and M781 ICs. The company prides itself on having been able to sell billions of endpoint ICs for pennies through its partners.

Other income Sources Including system sales software, thousands of gateways sold for $1000 apiece, tens of thousands of readers sold for $100 apiece, and millions of integrated circuit readers for $10 apiece. Impinj has supported connectivity with over 60 billion products to date (with the help of its partners) to enable timely information derivation through wireless communication.

M780 and M781 chipsets

Chips as we know them are the heart of RFID, and these latest additions come as the next generation components in the industry. RAIN RFID tag chips have more memory than the M700 series and are specially 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 previous M700 series which only offered 96-bit user and 128-bit user memory. The Impinj M781 chip also has 128-bit user memory and 512-bit user memory. Expanded memory format Allow Slide to capture data like batch/IoT, production date/expiration and weight.

In addition to these new chips, the company also announce New reference design portfolio dubbed Impinj Core3D Antenna. This reference design helps the current Impinj M700 chipset perform omnidirectional reading. In the past, back-read RFID tag chips could be read from any direction regardless of the orientation of the RFID studs. Other antennas are linearly polarized and only read from one particular plane. Core3D Antenna will ultimately improve system readability and accuracy by simplifying tag development and grafting. Prior to this development, RFID users had to adopt a circularly polarized antenna which in my view could not work as efficiently as Core3D Antenna.

Another important user advantage of the 496-bit M780 is that it allows a minimum of 124 hexadecimal characters to be encoded into an RFID tag. This addition is also a step up from previous versions which contained only 24 and 32 characters encoded in an RFID tag.

M781 RFID has 128-bit EPC and 512-bit user memory. It will be up to the user application to decide if more memory is needed in the user EPC. These two sides contain different information that can be retrieved to allow tracking of precise information such as the batch number or dates of manufacture of the product. What Impinj has done is cater to both groups of users, i.e. those who need more EPC memory will use the M780 while those who need more user memory will use the M781.

Market dynamics

RAIN RFID Global Market It’s valued at an upwards of $3 billion in 2021. At that time, IC unit shipments stood at 28.9 billion units. End tag/transponder units in 2021 reached 27.7 billion units while reader shipments were over 261,000 units. In my opinion, I believe approximately 40 billion RFID tags will be used in 2022 due to their low cost nature. It gets even more exciting with Impinj adoption The use of RFID in tire tracking systems. This improvement stems from the fact that manufacturers have long been using RAIN RFID tags to track commercial trucks and agricultural tires. When it comes to consumables totaling trillions annually, only 0.3% of these connectable items are believed to be connected.

Impinj expects to get more orders in 2023 especially due to the demand for E-family products. The Company started Q4 2022 with a significant portion of the system backlog with Reader and Portal revenue meeting the Company’s expectations.

Among the new introductions to PI in 2023 include the Impinj 775 which doubles as a new endpoint IC. Paired with an “ISO Standard Cryptographic Engine” that has a unique key on each IC. The PI reader ICs also contain new firmware that supports challenge-response dialogue with endpoint ICs. There is also an Impinj authentication service that allows verification of ICs at millisecond speeds. This service prevents counterfeiting by authorizing only endpoint integrated devices, enhancing safety and securing the supply chain.

Risks to consider

Impinj recognized a decline in portal revenue even as reader revenue remained flat in the third quarter of 2022. The company decried increased costs for endpoint integrated circuits as well as systems with vendors and subcontractors citing price increases in the future. Cost of revenue increased 38.7% (YoY) to $30.8M with total operating expenses increasing 10.7% (YoY) to $39.2M. The increase in those costs caused Impinj to post a net loss of $2.2 million for the quarter. However, this loss indicates an increase of 80% (QoQ) from a loss of $11.5 million recorded in the second quarter of 2022. The increase in costs may eventually force Impinj to pass costs on to its customers which could lead them to opt out of its products. competitors and thus influence product margins.

Supply chain headwinds continue to affect the chip industry. Impinj recognized in the 10-s It ran into a silicon wafer shortage. Silicon is the main component material used to manufacture the RFID transceiver microchip. Moreover, it’s not just silicon, Impeng noted that it was experiencing a general component shortage that even restricted shipping to readers in the quarter. This shortfall affected the final stage of staging production forcing Impinj to enter the fourth quarter of 2022 with a significant backlog in system production. Initially, this backlog shows business progress but the large level indicates to some extent that the company is experiencing a significant shortage of components.

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As a growth-focused investor, I’ve 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 the share price will exceed that level by the time it reports Q4 2022 earnings and FY2022 earnings in February 2023. Despite the supply side element constraints, Impinj managed to post over 50% (Y/Y) Growth in Q3 2022 sales. This increase is commendable given that the company is introducing new segments to cover a larger untapped market share. I expect the company to experience significant demand in 2023. Therefore, I recommend a Buy rating for this stock.