The rumors have been swirling for many months when Amazon (NASDAQ:AMZN) would make a foray into the grocery/convenience store space. It appears the time is fast approaching when physical Amazon stores will be popping up around the country.
While the details about these locations is still a bit sketchy, it's apparent that Amazon will be testing the waters on new checkout concepts as consumers leave the store.
From what I've been reading in the news, it appears Amazon wants locations where you can walk in and simply walk out without scanning the items through a traditional point of sale scanner.
Meet Digimarc (NASDAQ:DMRC). I wrote an article about the company and its barcode concept in January 2015. Needless to say, I've had the idea of changing the way consumers checkout on my mind for a while now.
Before I go any further, I'm going to explain the product/technology DMRC possesses, and I think you'll understand why I immediately thought of DMRC when a company like Amazon plans to disrupt the checkout process at stores.
Essentially DMRC has proprietary technology that can enable a product's barcode to be embedded across the entire surface of the packaging. To the naked eye, you cannot tell the difference between a product with the Digimarc label versus a product without. Only specific point of sale scanners and cell phone applications can read these barcodes.
Source: Company White Paper
The label provides several benefits to a retailer. The primary one being that the items can be scanned through checkout much faster due to the invisible barcode being more visible to a scanner than a single barcode. As part of the PR around this technology, DMRC set the Guinness Book of World Record for fastest retail checkout in 2014.
I'm certainly not trying to imply Amazon is going to be implementing DRMC's barcode technology. In fact, I'd be surprised if AMZN did. However, the fact Amazon is going to be disrupting the shopping experience has me assuming other retailers are going to follow suit. I highly doubt if Amazon gains traction & PR around its checkout-less stores, Wal-Mart and other retailers are going to sit around and do nothing.
This could potentially be the tipping point DMRC investors have been waiting for in the checkout space for several years now. As you research the idea of the Digimarc barcode you will realize that the barcode would be beneficial to retailers, however very few retailers have adopted the technology.
Thanks to Amazon, retailers around the country might have to address the concept of faster checkout in the fear of losing (even more) business to Amazon.
If you've followed DMRC for any extended period of time, you know that this company has been working on a pipeline of business for this barcode for many years now. The challenge the company faces is it needs consumer packaged goods companies to license the technology. However, the pressure to adopt the barcode needs to come from giant retailers such as Wal-Mart, Costco (NASDAQ:COST), because the stores benefits from faster checkout times.
In other words, the consumer packaged good company is being asked to pay for a benefit the large retailer is going to achieve. It's honestly a somewhat odd business model, so it comes as no surprise the company needs a catalyst that forces the hand of large retailers to pursue faster checkout times.
This is why I immediately thought of DMRC when Amazon Go was announced. DMRC needs retailers to aggressively pursue faster checkout times - and one way is by convincing consumer packaged goods companies to license barcode technology from DMRC.
Most DMRC followers already are aware the CEO of Wal-Mart has posted on Instagram (NASDAQ:FB) using the barcode before. Wegmans was the first retailer to actually adopt the barcode technology in store. More recently the company added Berry Plastics to the line of clients.
Overall, the company reported $907,000 in licensing revenue for the most recent quarter ending September 30, 2016. Year to date the company reported roughly $2.6M in revenue from the segment. While these are paltry numbers even for a "small" public company, it's the gross margins on this product line that could be exciting for long-term investors.
For example, on the $2.6M in revenue DMRC recognized within this segment of business through 9 months this year - the company 'only' recognized $302,000 for cost of revenue.
While I'm aware DMRC is spending marketing dollars not connected to the cost of revenue, the high gross margins associated with the barcode business could generate significant free cash-flows if the barcode ever reaches scale.
Do Your Homework
I've been following this company for nearly 5 years now and I've never purchased a share. It's important that you understand this company currently does not make money, and it primarily has been raising money by issuing stock. There is no need to run out and buy shares of a company based on a product line generating $900K in revenues in the most recent quarter. However, under the right circumstances, DMRC could make an attractive speculative investment based on the fact Amazon is about to disrupt a space DMRC has a solution & pipeline of customers for.
DMRC needed a catalyst to get big retailers to want to speed up checkout times. I believe that catalyst could come in the form of Amazon disrupting the checkout experience in forthcoming stores. That potentially will spur other retailers to pursue strategies to speed up checkout times. One proven way to do this is by implementing DMRC's barcode onto the packaging of items within the store. Now that retailers have a reason to pursue faster checkout times, it might be only a matter of time Digimarc starts scanning profits for shareholders.
Disclosure: I am/we are long AMZN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.