Why This Small Cap Company Will Blow Past Computer Giants

Key Points

• The United States economy is going through a crucial pivot; smaller companies able to flexibly adjust to these changes will likely benefit. This industry is showing vital signs of expansionary activity.
• Identiv is the perceived winner within this industry, and its size allows it to take advantage of abrupt moves in the underlying drivers of its respective space. 
• Previous flat performance may be on the verge of turning around, especially after management lands new deals to improve its customer value proposition.
• Markets reward the stock with richer valuation multiples, placing bullish expectations for future earnings; investors should too.

Small companies can pivot quicker and adjust to abrupt movements in the underlying economy, like changing gears and direction on a race car. Conversely, larger companies take more time and effort to pivot and adjust the comparative tanker or bulker ship. Now that the United States economy is pivoting due to the FED combating rampant inflation rates via orthodox tools like raising interest rates and decreasing liquidity across markets.

Some industries are naturally bound to outperform during these adjustments, as others are also naturally set to underperform. Today investors have a chance to get a leg up on the next market move, positioning themselves before larger capital pools rotate with the market.

When looking at the past seven months of United States ISM manufacturing and non-manufacturing PMI data, trends pointing to the industries set for a breakout become clear.

The computer hardware industry has been flashing green lights across the board in the central readings within the report, such as New orders, production, and employment.

Combining growth readings in these inputs, investors can assume that backlog orders are rising in the space, pushing the need for increased production and capacity for new employees. The key now becomes finding the perceived winner in the industry; for reasons that will become clear, Identiv NASDAQ: INVE is the prime choice for investors to consider a purchase.

Understanding the Past

Identiv's chart may look like something out of a recession nightmare, four years of flattish price action from 2016-2020, followed by an aggressive peak and a subsequent decline. Investors can look to Wall Street's definition of a 'Bear Market,' which points to a 20% price retracement from all-time - or recent - highs.

In the case of Identiv, the stock reached a peak of $29 per share at the end of 2021, which would make the 'Bear Marker' price of $23.2 robust for investors to shoot for as a proximate target. Identiv analyst ratings are pointing in the right direction, as they have now assigned a consensus price target of $11 per share, translating to a 28% potential upside from today's prices.

These initial ratings may lie conservative, perhaps awaiting new reasons to increase the sentiment and create a new potential ceiling. When looking at the financial performance in Identiv's financials, investors can understand why the sudden peak occurred in the stock price.

The company's revenue proved to be on a stagnant path since 2016, hence the lack of price action, then grew more than 50% in 2020 along with earnings, fueling a stock rally as big as 480% to the 2021 peak. Today, revenue and gross profits return to their old ways, staying in a tight range for the past year, as measured by quarterly results.

As management attempts to hang on to recently found momentum, new strategic moves are being laid out and rewarded by the market.

With the latest quarterly results in the company pointing to some disappointing figures, posting a total loss of $0.13 per share when analysts expected only a $0.04 loss per share, it would seem that a big announcement or pivot needs to take place in the underlying firm to dig investors out of the losses.

Luckily for shareholders, Identiv is small enough to effect changes without severely affecting their financials or performance metrics. Management is on top of these trends. New announcements have called for richer valuation multiples into the stock, attracting higher-quality investors.

The Future is Bright 

As an initiative to diversify customer bases and product mixes, management has expanded the company into IoT pixel tags, which fit right into Identiv's value proposition to its current customer base. These new tags will allow for a seamless experience in tracking supply chains and security, providing more accurate data and feedback loops for optimization.

A multi-million dollar order, not the first from the company, was made for Wiliot's tags. Making this purchase amid a disappointing quarter can be a testament to the bullish demand outlooks management is expecting. 

Markets have taken notice of these developments, especially what they may imply for the future valuation of the stock. Broader investors favor Identiv over peers, as the following valuation metrics express.

Companies like HP NYSE: HPQ and Dell Technologies NYSE: DELL trade forward price-to-earnings ratios of 9.2x and 8.8x, respectively, compared to Identiv's superior 69.8x multiple.

Traders look at the forward P/E rather than a conventional P/E, as the former considers the following twelve-month earnings expectations to understand where the market is valuing these projections. Some may argue that Identiv is now the most expensive alternative in the space, given its higher ratio.

However, this can imply a willingness by markets to overpay for each dollar of underlying future earnings. This willingness to pay a premium comes from the expected earnings that pixel tags can bring.