|Impinj the ‘Best Way to Play’ the ‘Tipping Point’ in RFID, says Morgan Stanley |
By Tiernan Ray
February 23, 2017, 11:45 A.M. ET
Shares of Internet of Things technology maker Impinj ( PI) are up $1.45, or 5%, at $29.94, after Morgan Stanley’s Craig Hettenbach and Joseph Moore today offer up a team effort, initiating the stock at Overweight, with a $40 price target, writing that it is the “best way to play” what they see as a “tipping point,” in so-called “radio-frequency ID,” or RFID, technology.
“We see the company leveraging its technology leadership (200+ patents) and strong market position (60% share), capitalizing on a $10bn+ opportunity in RFID and connectivity,” write the duo.
RFID, the authors write, is “reaching a tipping point,” and Impinj is the company that has all the parts to capitalize on that:
We see accelerating RFID adoption, as evidenced by a strong uptick in end point IC shipment growth for Impinj to 71% in 2016, up from 21%/52% in 2014/15 (Exhibit 1). The company’s initial focus markets of Retail and Healthcare offer a substantial ~$10bn opportunity by 2020, while newer verticals such as Data Center, Travel, and Automotive should propel growth further. Importantly, with less than 10% penetration in retail and 1% overall, there is still significant runway for growth in RFID technology in the coming years. The company is the only supplier with all 3 elements of the RFID solution (End point ICs, Reader ICs/Readers and software). As a founding member of the Radio Frequency Identification Alliance (RAIN), we also think Impinj is in a strong position to optimize its technology solutions. The company has over 60% market share in end point and reader ICs, while competitors such as Zebra and Alien buy its ICs. In addition, we see merits to its platform sales approach allowing the company to sell higher margin connectivity and software solutions and expand upon its already entrenched position in end point ICs.
They like the growth outlook:
We model a 3-year revenue CAGR of 26%, which could prove conservative relative to recent growth of 43%. In addition, we see favorable GM trends, estimating 310 bps of expansion to 57.1% through 2019. We view the next 1-2 years as a time for the company to reinvest in the business and drive outsized growth, followed by a period of substantial operating leverage in 2019/20. Our PT of $40 is based on a EV/S multiple of 4.2X. This is above the current multiple of 3.6X, but essentially in line with other high growth small cap stocks, despite Impinj’s faster growth and greater operating leverage.
Mind the looming lockup expiration on insider shares, though:
On March 2, 2017, an additional 1.34mn shares (6.5% of Impinj’s outstanding stock) will be eligible for sale in the public market. The company has no other lock ups after that. We recommend using any volatility around this lock up to add to positions. Impinj has traded off 19% since earnings last week vs. the SOX index up 2%, which we view as an attractive entry point ahead of the upward revisions we anticipate for 2017 revenue and EPS.