Description

Thesis

We believe Identiv (INVE) provides an attractive risk/reward at its current valuation and has tangible catalysts to drive the stock higher in the next 12-24 months. INVE provides radio-frequency identification (RFID) Internet of Things (IoT) devices and IoT software platform to digitally enable and secure any physical item or place. The Company executes this strategy through two business segments: the Identity segment for IoT and RFID-enabled solutions, and the Premises segment for physical security and access control.

As the IoT market continues to grow at ~20% CAGR over the next several years, we believe INVE is in a great position to capture market share. They have recently invested to bring highly integrated manufacturing, specialty R&D, and additional sales capacity which will not only allow INVE to personalize their products for customers’ needs but also provide the devices in high volume at low cost moving forward. INVE continues to win a plethora of designs and product launches with new/existing customers, is shifting focus towards the healthcare segment which brings higher margins, and have recently opened a manufacturing facility in Thailand that will lower costs by 15-20% - all of which should help grind the stock higher as earnings beats estimates.

Supporting these RFID opportunities is the cashflow from Identiv’s “Premises” business (40% of Q2 ’23 total revenue), which provides access control and entry systems for government buildings at the local, state, and federal level. This nearly 60% gross margin business is currently growing ~15% annually with substantial tailwinds following broad-based local and national security concerns and a period of underinvestment during Covid. 

Additionally, INVE has recently mentioned on their Q2 2023 earnings call that they have hired a financial advisor to realize the full business potential of their two segments. The Board is working very closely with the adviser on a strategic review. Given the fact that the stock is closely held, we believe this comes on the heels of shareholders’ agreement on a potential sale to firm up their balance sheet. We believe that the path to maximize shareholder value comes from a sale of the Premises business that could be valued at ~$200 million, or ~13.5x EV/2023E EBITDA. This would be nearly the entire valuation of INVE’s current total enterprise value (~$231 million).     

INVE currently trades at $8.15/share, 42% below its 52-week high but 61% higher than its 52-week low. This reflects EV/EBITDA multiples of 33x and 13x for consensus 2024E and 2025E, respectively.  

We believe the share price is more reasonably valued at $16.17, an implied 98% upside from current levels. This values the Company using a SOTP using $200 million for the Premise segment and 3x EV/2024E sales for the Identity segment. We believe INVE could inflect to FCF positive next year to help further fortify its already solid balance sheet – which currently has net cash of $12 million ($22 million cash, $10 million revolver balance outstanding). The Company expects to fully repay revolver debt within the next 3 quarters.

Why the opportunity exists

The Company is trading 41% off its 52-week high and 71% off its 10-year high largely due to supply chain challenges as a result of COVID. As supply chain worsened in 2021, INVE was still confident in their ability to meet the demand they were seeing and even pointed to chip shortages being resolved by 2022, along with the extra cost/logistics that came with the challenges. However, to end 2021/begin 2022 INVE could no longer keep these supply chain issues at bay and the stock sold off 27% reporting Q4 2021 results as gross margin missed due to component shortages and mix. The stock proceeded to grind lower as investors recognized that these issues would persist for a lot longer and deeper than anticipated.

The next major sell-off happened during the Q3 2022 earnings release when INVE’s sales fell short – mainly due to component shortages that consequently led to customers’ demands not being met. The industry-wide lack of semiconductor supply eventually caught up to INVE as their primary source, NXP (who made up 85% of supply), opted to prioritize their limited resources to other higher gross margin customers. Investors were frustrated with the management’s poor handling of the supply chain and feared that this could be an excuse for an underlying demand problem for their products. This drove the stock to its 3-year low at ~$5/share.

Today, INVE still sits at mere $8.15/share after a string of positive announcements including supplier diversification with the addition of ST Micro, seamless opening of the Thailand facility, extra supply chain costs abating and robust pipeline for design wins/product launches. However, we believe the current share price still underappreciates the numerous tailwinds the Company will benefit from in the near-to-medium term.

Current Example Use Cases of RFID Devices

• Mobile accessories – to communicate with surface chargers to ensure the charger safely passes electricity only when the phone is in contact with the charger
• Syringe dispensers – to verify whether the syringe dispenses the exact right amt. of a patient’s medication
• Prescription pill bottles – to communicate with smartphones which will announce the medication details and directions, particularly helpful for the visually impaired
• Medical consumables – to enable a customer’s product to track authenticity (i.e, usage of breathing tubes for ventilators)

Notable RFID Projects Pipeline

• Auto-injector syringes – to ensure cancer drugs only occur within specific temperature ranges for optimal results
  • Opportunity represents hundreds of millions of units per year at ASPs of $1
    • INVE currently produces ~200M tags per year at ASPs of $0.20-$0.25
• Supply Chain – to communicate with operators on the environments’ temperature, pressure, shock, humidity, authenticity, etc.
  • Ensures shipment has stayed within its safety parameters and remains unspoiled from a temperature perspective
  • Ensures shipment has remain in compliance with govt. regulations and, potentially, tax authorities – currently being evaluated in the cannabis industry
• Wiliot – to support both passive and battery-assisted devices
  • Recently finished a 25-million-unit order at end of Q2 2023, and have received a follow up order of similar magnitude

Valuation

• Management guidance calls for $125-130 million of sales in FY2023 and OpEx to be flat in 2H vs 1H of 2023
  • Consensus calls for $4.5 million in EBITDA for 2023E
• For 2024E, Consensus expects $141.4 million in sales and $7.0 million in EBITDA
  • Segment EBITDA is not reported. Estimated segment operating expenses have been assigned to determine segment EBITDA

• If we assume a sale of the Premises segment to occur at ~13.5x EV/2023E EBITDA or 11.2x EV/2024E EBITDA…
  • Premises top line has grown low-double digits to mid-teens CAGR over last 3 years
  • Estimated high 20%, low 30% EBITDA margins
  • High durability as majority of customers are government-based
• …Then current implied enterprise value of its Identity segment is ~$31 million, ~0.3x EV/2024E Sales
  • Very cheap due to aforementioned tailwinds, particularly as the broader IoT market grows ~20% CAGR over next several years

Financials

Catalyst

• Recent RFID focus and wins in the healthcare/medical space widening TAM and gross margins (medical accounts for more than half non-recurring engineering (NRE) projects)
• Wiliot demand acceleration
• Driving down RFID costs with the opening of Thailand facility expanding margins
  • Management has noted that the Thailand facility will add 5-6% to gross margin once fully ramped up
• Potential sale of legacy Premises business (strategic review first confirmed on 5/4/2023, Q1 2023 earnings call)
• Need for additional safety in schools, government buildings, and other areas where people congregate

Risks

• Slow growth in IoT end markets
• Resurgence of component shortages due to supply chain impacts
• Customer conversion yield for RFID tests / design wins / product launches significantly and unexpectedly decreases
• Technological disruption both in the RFID / Identity and Premises markets
• Technological failure in either the Identity or Premise segments
• U.S. government funding for premise security declines