A Great Google Idea Leads to Investor Insanity

Includes: GOOG, INVE
by: Nigam Arora

Google (GOOG) has a great idea to attract more local searches from consumers using its search engine. In September 2009, it launched a service called Google’s Place Pages. This service included a web page that a consumer can access to find information about a business’ hours, phone number, address, coupons, and reviews. In February 2011, Google launched an adjunct to Place Pages called Hotpot. Hotpot includes NFC RFID technology to connect consumers with businesses.

NFC stands for near field communication. It is a set of short-range wireless technologies operating at 13.56 MHz. NFC includes an initiating device such as a phone and a target such as a sticker.

RFID stands for radio frequency identification. RFID uses radio waves to exchange data between a tag and a reader. There are two kinds of tags: Active (with a battery) and passive (with no battery). Here we are dealing with passive RFID. RFID tags are semiconductors.

A majority of the phones today are not NFC equipped, but it is anticipated that NFC will become a standard feature of the smart phones in the future.

The objective of the Hotpot program is to deliver information to the consumers on the sidewalk at the moment they are making the decision to enter the store. The store owner attaches a RFID tag embedded in a sticker or a poster to the front of the store. A unique ID number is encoded in the tag that instructs the phone with an NFC feature to display the appropriate Place Page from a Google server on the phone.

The RFID initiative of Google started in Portland with about 250 businesses. The estimate at The Arora Report is that Google sent nearly 10,000 RFID stickers to Portland businesses. Google took this program to Austin, Texas based on the Portland experience.

So far so good: Just a great idea from Google and no investor insanity.

But investor insanity started yesterday morning when a small company Identive Group (INVE) issued a press release announcing that it has been selected as the exclusive supplier of NFC RFID stickers for the roll out of Google Places in Austin. The company was very clear that it was not selected for a nationwide or world-wide roll out; Identive is simply a supplier for Austin, Texas.

The media and the stock newsletters picked up the press release, but ignored that the deal was for Austin only. Pretty soon stock market gurus were proclaiming this to be a nationwide deal and, in their infinite wisdom, proclaiming that the deal meant tens of millions of dollars to Identive. The followers of the gurus jumped en masse into the stock, generating a feeding frenzy. As the stock started to rocket, the gurus used the exploding stock price as a confirmation to tell their followers about their stock-picking prowess. As the followers accepted that the stock price confirmed their gurus’ opinions, they became more aggressive in buying the stock.

The chart illustrates the feeding frenzy.

I am an electrical engineer and have been working with RFID tags since their infancy starting over 20 years ago. With this deep knowledge of RFID tags, it was not hard to do a simple calculation. If Google is paying $0.04 per tag, and Google buys 10,000 tags (same number as The Arora Report’s estimate of the tags for Portland), Identive received business worth $400.

There are hundreds of RFID vendors across the globe. RFID tags are a commodity and their prices are coming down rapidly.

The projection at The Arora Report is that by the time Google rolls out this program nationwide, Google may be able to procure these RFID tags for $0.02 apiece. A back-of-the-envelope calculation shows that even if Google got 5 million clients (a very high estimate, in my opinion), and Identive beat out all of its competitors, Identive would receive total business of $100,000.

It appears that Identive was not the exclusive supplier for Portland.

RFID tags are of two kinds: Contactless and the ones requiring a contact with a device.

The investors also do not seem to have recognized that Identive tags have to be touched by a phone equipped with NFC. Most phones today are not NFC-equipped. Contactless RFID tags with a read range of a few centimeters are widely available. The cost of contactless tags is falling. A transition to contactless tags is likely to take place and thus obsoleting Identive tags picked by Google.

I am not belittling Identive’s achievement, but when the market cap of a stock increases by $144,409,800 on a $400 order of a commodity product, there is no way to describe it except to call it investor insanity.

In Identive’s defense, the company neither exaggerated nor was promotional in its press release. Hypothetically, even if I am grossly wrong, the conclusion is still the same. All estimates in this article are qualitative in the context of my opinion in the role of a journalist and have not been verified by Google or Identive. I am not privy to the nature of Identive’s contract with Google or the prices received, but it is clear that this is a valuable contract for Identive. Is the contract worth $144,409,800?

As I have previously shown in my articles on Nvidia (NVDA) on Seeking Alpha and my writings here on a number of stocks over the last three years, when investors follow the gurus without questions, those who can combine deep subject matter knowledge with the knowledge of how markets work are able to profit handsomely.

Disclosure: I am short INVE.