Written by Scott Matusow and Michael Kovar
Mention "The Internet of things" (IOT) to those who work in technology and watch them get instantly excited. IoT has been a concept for years which is just now becoming a reality. Several large-cap tech companies are investing billions into it and several unheard of small-cap companies will end up growing or getting acquired by the large companies in the segment.
Cisco (NASDAQ:CSCO) defines IoE as bringing together people, process, data and things to make networked connections more relevant and valuable than ever before - turning information into actions that create new capabilities, richer experiences and unprecedented economic opportunity for businesses, individuals and countries.
Last year, Cisco announced a definitive agreement to acquire Sourcefire, a leader in intelligent cybersecurity solutions, for $2.7 billion. It also launched its global re-branding campaign with its "TOMORROW starts here" and "Internet of Everything" advertising campaigns.
In May of this year, Cisco announced Toronto, Ontario, as the location for its new $100 million Internet of Everything research center. Judging by the acquisition and investment in this facility, Cisco is being very aggressive pursuing the opportunities IoT is bringing - it is not alone.
Intel (NASDAQ:INTC) is another large company that is already bringing in significant revenue via the Internet of Things. While many companies are more in the beginning stages of IoT, Intel is well beyond that. During the 2013 fiscal year, its Internet of Things group had $1.8 billion in sales while generating $550 million in operating income.
Investing in companies like Cisco and Intel is certainly a good proposition because of the forward-looking mentality both are currently displaying.
With the huge market caps and revenue streams in other areas already existing for these companies, the percentage gains in these already successful stocks could be limited.
So, we have turned to the small-cap stock world and have been searching for a company with the kind of management that we feel could transition a small-cap company into an eventual large-cap one.
The company we have made an investment in and have begun to cover is Identiv Inc. (NASDAQ:INVE). We feel Identiv has great upside potential since it has been off the radar for some time due to prior management's poor execution.
However, late last year all but one member of senior management was replaced, led by Chief Executive Officer (CEO) Jason Hart. Hart has 25 years of experience in this particular segment, He has been recognized for his software expertise in the past, and was named Australian Young Entrepreneur of the Year by Ernst & Young in 2002.
We have personally spoken with senior management at Identiv, and we like what we have heard. For starters, the company has little focus on stock promotion at this time. We think stock promotion when telling a truthful and honest story is a good thing, but far too many small-cap companies are more concerned telling stories to "pump" their stock price rather than focusing on business execution - one of the biggest reasons why small-cap companies fail.
Jason and his management team made an agreement amongst themselves when taking over at Indentiv not to focus on press releases and investor relations at first. Rather, it will focus on turning around Identiv and positioning it to take advantage of the incredible growth that the IoT segment is currently experiencing and will experience moving forward.
When we first heard of Identiv from activist investor David Callan, we were of course skeptical. We have been used to Callan being combative and critical of management and engaging in strong anti-management activism. To hear him say "this is the most impressed I have been with a management team in years" certainly caught our attention.
Some might recognize David Callan's name. David was involved in successful activism by helping see both Obagi Medical and Solta become acquisitions. Callan has been accumulating Identiv stock for some time now, although we do not know how many shares he currently owns. So after talking with Callan, we decided to listen to the company's last earnings call.
Some highlights we noted from Identiv's last earning's call:
- Engaged a 10 to 1 reverse split not only to regain Nasdaq compliance, but to also effectively shut out the former financiers from attempting to toxic spiral the company
- Cut roughly 140 jobs and are near its target employee count of 300
- Closed its office in Germany and reopened its Washington D.C. office
- Regained government compliance and were added back to a list of 10 companies that government contractors are allowed to buy from
- Retired loan agreements that prior management erred with by engaging in them
- Engaged a new line of credit for up to $20M to use for working capital
- Is guiding $80 to $90M in revenues for the year
Also, as we continue to dig deeper into the Identiv story, we came across a YouTube video with Jason Hart speaking at the ISC West 2014 conference. In this video, Hart states that Identiv will see positive earnings before interest, tax, depreciation and amortization (EBITDA).
Additionally in the video, Hart speaks about IoT and demonstrates how some of the technology works using a Disney (NYSE:DIS) Infinity toy as an example. Disney has begun to ultilize the technology Hart speaks about in the video, and is rumored to be working with Identiv in the area.
The technology spoken of is Identiv's "Trust Your World" platform which will be the company's primary focus moving forward. There is just too much to explain in words here for this article exactly what this platform is, but there is a YouTube video that demonstrates this platform in simple to understand terms.
Basically, this platform has the ability to serve a multitude of companies, from the smallest of them to the largest of them. This is one of the main reasons we have made an investment in Identiv as we believe this is an important part of the IoT future - to provide security for this emerging platform.
This kind of technology can prevent or greatly reduce many security concerns like the recent ones experienced by eBay (NASDAQ:EBAY) and Target (NYSE:TGT), which have miffed customers while making negative headlines. A central ID that is not user/password based, but rather hardware authenticated identity based would have prevented the eBay issue which revolved around usernames and passwords, and could have prevented the Target issue, where customer information was stolen by hackers accessing information directly from Target's own computers. In the future, retailers such as Target will not store this type of credit card information on their own servers. Rather, they will be stored in the cloud - much harder to track and hack.
Frustration may lead to consumers avoiding doing business with companies who suffer these security breaches, at least for the short-term if not permanently. This scenario can cost the companies and cost shareholders significant loss of money and shareholder equity.
Additionally, David Callan informed us that Jason Hart intends to "road show" the company in mid Q3 and Q4 of this year as the company expects to have the ammunition in hand to attract institutional investors. This factor is why we especially like Identiv - the stock is currently being valued based on poor past performance, which was almost entirely on the old senior management team and the 140-plus employees laid off.
The market simply does not know the developing story going on at Identiv and assumes the company will continue to lag. It does not know that an entirely new management team has been brought onboard, nor does it know about the company's focus and vision concerning IoT.
We believe if Identiv was a brand new initial public offering (IPO), it would probably be valued over $600M based on its current sales ($90M x 5 sales + growth + EBIDTA positive) and expected growth in the IoT segment.
Near Field Communication (NFC), an integral part of IoT
Jason Hart recently told the NFC times that Identiv will be heavily focused in the NFC tag space, which Hart believes will be a large area of growth now and in the future.
NFC technology is a short-range, low power wireless link that uses radio-frequency identification (RFID) technology.
This technology can transfer small data between two devices held a few centimeters from each other. Owners of Samsung's Galaxy line of phones have this feature built into their phone, and it's rumored that Apple's (NASDAQ:AAPL) iPhone 6 will offer this feature as well.
Additionally, NFC does not need a pairing code like Bluetooth utilizes, and the tech uses very little power so a phone's battery is barely used.
Examples of NFC usage include, but are not limited to:
- Setting a smartphone close to a contactless payment terminal to pay for goods and services like dining out
- Buying a new CD from your favorite artist
- Purchasing new shoes, hand bags, and a variety of retail goods and services
A virtually unlimited amount of goods and services can take advantage of this technology, and have already begun to. What makes NFC attractive to large corporations is their ability to use the tech to discover your personal preferences and shopping habits. This will allow them to specifically target consumers, which equates to big earnings for these companies.
Additionally, after speaking with the company, we have learned they are working on new technology which for obvious reasons they cannot tell me the specifics of.
Identiv has a valuation of 1x sales and at least two strong partnerships already in place with Verizon (utilizing NFC) and "the largest security company in the country," according to what Hart remarked on in the last earnings call. We are impressed with these developments and expect to see more press releases on these types of partnerships in the future.
However, as mentioned prior, far too many companies and some investors are over focused on press releases and stock promotion rather than valuation, earnings, guidance and potential earnings growth.
Identiv's new management team is about developing business results first, which is the way it should be. Personally, this is the most impressed we have been with a small-cap management team in all my years in the market.
In the case of eBay's recent data scare, it requested up to 145M customers to change their passwords as a precautionary measure. While eBay stated that no customer information was compromised, the very thought to hackers being able to potentially access customer critical data is alarming.
The future of IoT will encompass users moving away from simple passwords and toward a more integrated and streamlined identity management system. If such a system was in place for eBay, it's likely this attack and potential data compromise would have not taken place.
Identiv seeks to provide these companies services to avoid the pitfalls of minor and major security breaches. Physical access credentials, logical access credentials and multi- function IDs are but a part of what Identiv currently offers and is working on to keep up with future security developments.
The above is just a small fraction of the IoT field, so we can see why some analysts believe the market will be in excess of $7 trillion by 2020. We believe that in time, the strong management team will lead Identiv to a lot of success.
However, we want to caution investors not to expect the stock to just "take off" and be a huge multi-gainer in short order. As bullish as we are with Identiv's future prospects, nothing is a guarantee in business. We know this first-hand by covering small-cap biotech for years, and always think it's a good idea for investors to allocate their funds wisely in the stock market.
Obviously, we believe Identiv will be a solid success in the long-term. We have demonstrated that if Identiv was a new IPO, the likely market cap would be over $600M based on 5x sales, expected growth of IoT and the positive EBITDA statement by Hart. Considering the current market cap is around $80M, this would represent a 7x increase over the current stock price.
However, with all the stock promotion and "pump and dump" out there, we do not want investors to get the wrong idea here. Just because the stock price should be 7x greater now, does not mean it will be greater now. We have demonstrated that Identiv at its current price is extremely undervalued, and undervalued in a segment that many analysts believe will be in excess of $7 trillion by 2020.
A small-cap company like Identiv carries a lot of risk, and any major misstep by management can have a serious adverse effect on the stock price. We certainly do not believe this will happen, and Dave Callan does not believe this will happen either.
Identiv is currently being valued looking backwards and not forward. Looking backwards, we see the poor job former management did. Looking forward, we see top-notch new management and explosive growth in the IoT segment. As mentioned, unless management engages in a serious misstep here, we see a very limited downside here.
With a market cap under $100M, we currently see Identiv as a strong positive risk to reward ratio moving forward.
In all our due diligence, we strongly believe Identiv will be a long-term winner with potential large percentage gains. Therefore, we have made a considerable bet on its future. We think investors should engage in deep due diligence with Identiv. We have no doubt that once they do, they will agree with both us and Dave Callan.
Disclosure: The author is long INVE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.
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