Impinj (NASDAQ: PI) is a mid-cap chip stock that has quietly had a great year in 2024. The stock has returned over 93%, placing it among the top five best returning semiconductor stocks in the United States. Wall Street analysts remain bullish on the stock. The average of the seven price targets from October MarketBeat tracked is $246 per share. That implies an upside in the shares of 40% from their current level.

So, what exactly does Impinj do, and why has the market bid up the value of this company so much in 2024? I will answer that question and share my longer-term view on the opportunity Impinj has.

Impinj: Helping Companies Level-Up Their Tracking Capabilities

Impinj specializes in what it calls “item-visibility solutions." Impinj lets companies track their inventory by embedding small chips on their items. This allows for better inventory management and can help reduce counterfeiting and retail theft. Impinj makes two types of integrated circuits (ICs), another name for a chip or semiconductor. The first are endpoint ICs and the second are reader ICs.

Endpoint ICs are small chips embedded into item packaging. They use Radio Frequency Identification (RFID) technology to communicate with the reader ICs. The readers send out radio signals that connect to the endpoint ICs. The system relays the unique info in each endpoint IC back to the reader. This allows tracking of the exact location of each embedded item.

The company breaks down revenues based on Endpoint ICs and Systems. Systems include reader ICs and other related hardware and software. The revenue split between the two has consistently been around 75% for Endpoint ICs and 25% for Systems.

Impinj: Growing Revenues and Becoming More Profitable

Impinj has been beating estimates on sales and earnings in 2024. After the Q1 earnings report came out on Apr. 24, shares rose nearly 29% in one day. However, the company’s most recent report resulted in shares dropping 14%. This was despite the company beating on both sales and earnings and raising guidance above expectations.

Revenue grew solidly in Q2 at 19% and was up 46% in Q3. Profitability has also improved strongly. The firm's operating margin was 9% in Q2 and just slightly negative in Q3 after several quarters of being deeply negative.

Overall, the stock seems to be rising on the year based on positive sentiment around the market opportunity available for the product. Impinj appears to have established itself as one of the leaders in this silicon-based item tracking space. Another big firm in this space is Zebra Technologies (NASDAQ: ZBRA). However, its business is more diversified and is less focused on attaching RFID enabled technology to every item in a store or warehouse. NXP Semiconductor (NASDAQ: NXPI) also competes in the space.

Impinj's Untapped Potential Is Huge

The technology that Impinj is selling certainly warrants excitement. RFID tracking offers many advantages over traditional tracking methods, like barcodes. For example, instead of a barcode scanner needing a direct line of sight with a barcode, a reader IC simply needs to be within 10 meters of an endpoint IC to detect it. Additionally, it can collect information from many endpoint ICs extremely fast, communicating with up to 1,000 of them per second.

The market opportunity for Impinj is massive. Companies need to track trillions of items a year in some way. Every item in a store is tracked using a barcode, and the same is true for every package. The advantages of Impinj’s technology suggest it could take over these use cases. The firm describes its IC endpoints as costing "pennies." That means they are fairly cheap but will never be as cheap as barcodes, which cost next to nothing. RFID tagging likely will not make sense for tracking all products, but there remain massive opportunities for Impinj to expand.

One example is around the European Union’s (EU) new Digital Product Passport legislation. This requires all products sold in the EU to have a digital copy to track them. The goal is to track products through their lifecycle to increase sustainability. In 2027, this regulation will go into effect for textiles. Impinj’s capabilities would make it a perfect fit for retailers to comply with this regulation. That alone represents billions of items that could use Impinj’s endpoint ICs.

Overall, Impinj looks very expensive with a forward price-to-earnings ratio of 68x. But to me, that price makes sense when thinking about the massive market opportunity that this company has.