Investing in RFID Chips

One look around the office, and I can immediately tell it’s not going to be an especially productive day.

I say this not just because Labor Day weekend has half the office looking like extras from an episode of The Walking Dead, but also because today is our long-awaited fantasy football draft, and every computer screen in sight is filled with top-200 cheat-sheets and PPR rankings.

I was thinking about pulling a Bill Belichick and scoping out Keith Kohl’s computer from across the room, but Spygate is so 2007, and despite my team name being “Cheat to Win,” I’m not quite that serious about besting my colleagues in fantasy football.

I’m also finding myself a bit distracted heading into the season by something perhaps even nerdier than fantasy football itself — radio-frequency identification chips, or RFID for short.

On Thursday, when the New England Patriots host the Pittsburgh Steelers to open the season, every player will be equipped with a set of RFID sensors embedded in his shoulder pads, each emitting a unique radio frequency.

Each NFL stadium has been equipped with 20 receivers to pick up those radio frequencies in order to pinpoint every player’s field position, speed, distance traveled, and acceleration in real time. By doing so, the NFL aims to provide fans with information they’ve never had before.

In short, the Internet of Things (IoT) has officially made its way into the NFL.

Shoulder to Shoulder

Providing these RFID chips to the NFL will be Zebra Technologies (NASDAQ: ZBRA), a company that pivoted its business strategy to IoT and machine-to-machine (M2M) applications with the launch of its Zatar software platform in 2013.

The same year, Zebra Technologies launched its MotionWorks Sports Solution, which powers the NFL’s IoT initiative. Since the pivot, Zebra has grown its top line from ~$240 million a quarter to $890 million in its most recent 10-Q — not too bad.

But in growing its revenue stream, Zebra Technologies has jointly raised its OpEx more than 500%. What was once a profitable company is now burning over $75 million a quarter. There’s growth here, but Zebra Technologies is not the safest RFID play out there.

A better growth opportunity in the RFID space will likely prove to be a much smaller but profitable company known as SuperCom (NASDAQ: SPCB).

SuperCom provides electronic intelligence solutions for a number of governments around the world. The company operates in two business segments including electronic ID (EID) and radio frequency ID (RFID).

In short, SuperCom’s EID solutions help countries manage their digital identity programs. This involves providing software, hardware, and services for drivers’ licenses, passports, and national IDs. Its RFID products are used to monitor and track people and assets. 

Most notably, SuperCom’s proprietary long-range RFID technology offers a lower price point and better battery life (up to 10 times life) when compared to competing products. This is incredibly important because most embedded RFIDs are not rechargeable.

According to IDTechEx, the largest RFID and EID orders by far are placed by governments. China, for instance, recently dropped a cool $6 billion for its national ID card. New York/New Jersey E-ZPass spent $500 million. The UK spent $600 million for its passports. The list goes on.

The Global National eID Industry Report: 2014 Edition projects that nearly 3.4 billion national EID cards will be issued from 2013 to 2018, doubling global national EID card circulation from 1.75 billion to 3.5 billion.

In total, the EID market is expected to generate $54 billion in the same time frame, while the number of countries issuing national EID cards will increase 70%. No doubt the market is ripe for electronic identification, and this is good news for a private contractor like SuperCom.

The Internet of Everything

Of course, government contracts and the NFL aren’t the only sources of revenue for RFID manufacturers. Over the past several years, RFID has been penetrating virtually every industry imaginable. Its applications include electronics, pharmaceuticals, health care, retail, and transportation, just to name a few.

According to Frost & Sullivan, retail in particular has reached a “tipping point,” with RFID spending by retailers expected to grow at a hefty 39% CAGR.

As for the total RFID market, here’s the projected size through 2020 according to Statista:

Historically, SuperCom’s RFID segment has been focused on three main verticals: public safety (offender tracking), home & health care (patient and medical equipment tracking), and animal intelligence (herd and pet tracking). However, the company is also branching off into education, homeland security, and commercial supply.

If you’re looking for a fairly diversified RDIF play, SuperCom is definitely worth considering, but you won’t be able to hit every niche space with just one firm.

There are a number of smaller publicly traded RFID companies out there, each focused on a specific market. Some make RFID devices solely to track casino chips. Others take an even more Orwellian approach and use RFID chips to track humans (FDA approved, of course).

Whatever the application, though, you can feel confident that an investment in embedded chips is a relatively safe one.

Juniper Research recently forecasted 38 billion connected devices by 2020. While not as high as Cisco’s often-ridiculed 50 billion figure, that’s still more than five devices for every person on the planet.

Like it or not, the Internet of Things is here to stay.

Until next time,

Jason Stutman

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