IMPINJ, INC.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Impinj is a leading provider of RAIN RFID (Radio Frequency Identification) solutions, enabling the “Internet of Things” by connecting billions of everyday items to the internet for item identification, location, and authenticity.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Impinj operates in the Auto-ID (Automatic Identification and Data Capture) market, specifically focusing on RAIN RFID technology. Their platform includes RAIN RFID integrated circuit chips, readers, and software that enables businesses to connect physical items to digital platforms. This technology allows for real-time tracking and management of items across a variety of industries. The company’s revenue is split into two main categories:

  • Integrated Circuit Sales: This segment includes sales of RAIN RFID tag chips, representing the majority of the company’s revenues. These chips are embedded into tags that are attached to physical items for tracking and identification.
  • Systems Sales: This segment includes sales of RAIN RFID readers, gateways, and related software. This side of the business is critical to the company’s ability to provide end-to-end solutions for customers.

Industry Trends: The broader trends in the technology sector are quite favorable. The growth of the Internet of Things (IoT), specifically the RAIN RFID, is driven by demands for inventory management and automation. Additionally, with the rise of big data analytics, companies are looking for ways to collect data from their operations to improve them. Impinj benefits from these trends. The demand for the technologies that enable these shifts is on the rise. This industry is also very fragmented and competitive in the sense that there are lots of companies operating in it.

Competitive Landscape:

The competitive landscape is defined by a variety of factors. It is characterized by many small competitors with niche solutions and a few large companies. Impinj is a leader in the segment with a global reach. The competition can be analyzed in two layers:

  • Chip Manufactures: Impinj competes with the companies that produce RFID chips themselves and this industry is driven more by economies of scale. These are more commodity based.
  • System Integrators: Impinj is also trying to integrate itself with the customers and provide them end to end solutions. In this side of the market they compete with companies specialized in offering supply chain automation. They are the main partners.

What Makes Impinj Different?

  • Scale and Technology: Impinj benefits from its early start, providing the company with economies of scale and enabling them to offer better and cheaper solutions. They are a technological leader that has been continuously investing in R&D.
  • Ecosystem and Partnerships: Impinj has built a strong ecosystem of partners. These include tag manufactures, integrators, and channel partners. These partners are very important because most of the revenue is driven by them.
  • End to End Solutions: The company is uniquely positioned to offer an end-to-end solution to their customers. They manufacture chips, readers, and software and they manage the integration of them.

Financials In-Depth Analysis: Looking into their quarterly report, here is a analysis of their finances.

  • Revenue: Their revenue is driven almost equally from product and system sales. The three-month period ending September 30, 2023 has a total revenue of 77.1$ million.
  • Gross Profit: Their gross profit is at 43%. This has fallen dramatically from their 51% in the previous year, indicating severe supply chain and inflation issues.
  • Operating expenses: These are high, at around 50% of revenue, but these are normal for a tech company that is investing in future growth.
  • Net Income: The Net Income is negative for the last quarter, at $4.7 million.
  • Assets and Liabilities: Their current assets stand at 347 million, consisting mostly of short term investments (173.6 million), and inventory (91.6 million), while total liabilities stand at 123.4 million with a substantial amount of it in operating liabilities. They have more long term liabilities then assets which is concerning.

Moat Analysis: Based on the above analysis here is their moat rating:

  • Rating: 3 / 5: Impinj possesses a narrow moat, driven by its strong technology and partner ecosystem. They have a strong brand in the segment and have a huge number of partnerships. They are also benefiting from network effects as more users lead to more integration partners.
    • Intangible Assets: The company’s reputation and know-how in the RAIN RFID market act as a barrier to entry. Their patents also give them protection, but they are not extensive enough to provide a very strong economic moat.
    • Switching Costs: Switching costs can be a small moat because data is already integrated with their customers but they are not big enough to warrant a strong economic moat.
    • Network Effects: As the leading provider of RAIN RFID the company benefits from a strong network effect, as many tag manufacturers and system integrators use the platform, and that will become more valuable over time.
    • Cost Advantages: The company benefits from their economies of scale, being the largest producer of the RAIN RFID tag chips and having optimized processes.
  • They do not have such strong economies of scale, high switching costs, and network effects to warrant a wide moat, their moat is narrow, and is likely to be breached if another company emerges with better technology or process.

Risks to the Moat and Business Resilience:

  • Technology Risk: The technology is rapidly changing. Better and more efficient chips or different technologies in the field could render their system obsolete.
  • Competition: They are also facing increasing competition. New companies can steal away their market share if they do not keep improving their technology.
  • Supply Chain Issues: Supply chain issues can impact their ability to deliver products and increase costs. These were big issues in 2022, that they are still recovering from.
  • Customer Concentration: Their revenues are dependent on only a handful of their customers, and they are subjected to losing business if one of those customers leave.
  • Management Miscalculation: There is also the risk of management incompetence that will render their hard won moats useless.

Recent Concerns and Management Outlook: In their last earnings call, management has cited that demand has softened with macroeconomic headwinds. The market has a high volatility and they have to contend with price competition, meaning lower prices for the same amount of products. They have noted that they are working to reduce inventories, as their inventories are high. They also expect lower earnings in the coming quarter. There are some concerning issues that they have to address. The company is still on track to gain market share and is confident about the long-term prospects.

Understandability Rating: 3 / 5 Impinj’s business is moderately complex to understand because it requires understanding both the technical aspects of RAIN RFID technology and the various stages of a technology product. The business model of using a network of partners, and the combination of chip sales and system sales adds layers of difficulty. Also, the competitive landscape and the factors governing a moat are not very easy to analyze for the average investor.

Balance Sheet Health: 4 / 5 Impinj’s balance sheet seems healthy. They have high current assets to cover current liabilities, have a lot of cash and short term investments, and not too much long term debt. Their financial structure is generally stable and they can survive rough market conditions. While their recent revenue and gross profit has been impacted, they are still strong on the balance sheet and can absorb some more losses before affecting financial stability. They are also cash flow positive and not a burn company. Their largest issues are the short-term nature of their liabilities compared to their long-term debt, and the fact that they do have a small level of negative net working capital in the short term. However, the overall balance sheet health is good.