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RFID Still Lags as Investment Opportunity

Kevin Starke, senior analyst at Weeden, spoke at last year's RFID World for one of the pre-event workshops about investing in RFID. RFID Update caught up with him again at this year's RFID World last week in Dallas and had the opportunity to hear his thoughts on RFID investing in 2006 and how things have changed since last year.
Mar 08, 2006This article was originally published by RFID Update.

March 8, 2006—Kevin Starke, senior analyst at Weeden & Co., spoke at last year's RFID World for one of the pre-event workshops about investing in RFID. RFID Update caught up with him again at this year's RFID World last week in Dallas and had the opportunity to hear his thoughts on RFID investing in 2006 and how things have changed since last year.

At Starke's presentation last year, he noted that RFID represented an as-yet very small revenue source for the public companies like Symbol, Intermec, and Zebra that were expected to be among the leading beneficiaries of the technology's adoption. RFID wasn't "moving the needle" for any of them. When asked if that has changed over the last year, and whether RFID has now started to move the needle, Starke responded: "a resounding no." RFID adoption failed to increase enough in 2005 for it to become a meaningful revenue stream. "It has been frustrating for some people watching these stocks waiting for RFID to kick in," said Starke.

He noted that Intermec booked $26 million in 2005 due to its Rapid Start Licensing Program, but that revenue represents one-off initial fees from program entrants, and so cannot be expected to recur. (There will be ongoing licensing fees to Intermec as licensees sell RFID product, but those have yet to materialize due to the overall softness of the market.) Starke said that when RFID accounts for more than 10% of Intermec's revenue, the company will break it out as a separate item on the books. That Intermec hasn't done so means, of course, that more than two years after the Wal-Mart mandate, RFID stubbornly represents less than a paltry one-tenth of Intermec's total sales.

There are other aspects of the RFID business that the investor would be wise to consider. Starke wonders if RFID is really the "green field opportunity" for Intermec, Symbol, et al. that everyone supposes. RFID may actually be more of a "replacement demand" situation, wherein much of the revenue it generates will replace -- not augment -- sales related to obsolescing technology like bar codes. In that case, RFID is more "do or die" than it is a lucrative new market; to survive as bar code sales wane requires selling RFID.

With respect to printer manufacturers like Zebra and Printronix, the RFID opportunity may only be a temporary one. Many predict that the current practice of selling RFID tags in label form factors will pass. Ultimately, tag volumes will reach a point that incorporating RFID directly into packaging will become economically compelling, causing the demand for label-printing equipment to diminish. This eventuality is years away, however, giving printer companies time to adapt and diversify as necessary.

On the ever-alluring topic of initial public offerings, Starke pointed to three RFID companies that are leading IPO candidates: Alien, Impinj, and ThingMagic. He noted that many of the players in RFID will probably not go public, as their business models don't represent opportunities for annual sales in the $100 million range, a threshold Starke sees as key to a technology stock's longevity. "Tech companies below $100 million [in sales] are difficult investments because of the quarter-to-quarter fluctuation in sales and earnings," he said. Sub-$100m annual revenues combined with sporadic sales cycles make it hard for such companies to maintain an institutional following of their stock. A more likely and appropriate path for some of the successful RFID pure-plays will be as acquisitions by much larger companies who can leverage economies of sales to dramatically bolster sales, marketing, distribution, and R&D.
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