Morgan Stanley Downgrades Impinj Following Nearly 50% Rally Since May 4

IMPINJ IncPI

Morgan Stanley's Craig HettenbachK downgraded shares of the radio frequency identification provider from Overweight to Equal Weight but with a price target boosted from $40 to $51. The analyst remains bullish on the company's leadership position in the RFID market, but at the end of the day, a downgrade is justified on valuation concerns. Impinj's recent stock gains is entirely driven by multiple expansions, which now places a "higher burden" on estimate revisions for future gains, the analyst argued. In fact, this multiple expansion now implies investors are better off finding better "opportunities to put new money to work."

Math Behind The Price Target

Related Link: 15 Stocks Moving In Monday's Pre-Market Session Short Squeeze Could Be Driving Impinj's Rebound _______ Image Credit: By Marias-Impinj (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

The analyst's $51 price target is based on a 5.5x EV/S multiple on 2018's estimates which represents an increase from his prior estimate of 4.2x. The higher multiple is justified based on how the company screens favorably versus semiconductor and software comps.

Impinj is expected to grow sales at a 28-percent compounded annual growth rate through 2018, which is above the 20 percent median for growth semi comps, Hettenbach continued. The stock is also trading at a 5.8x EV to 2018 sales, also above fast-growing semiconductor peers at 4.0x, SMID cap software companies at 4.7x, and Russell 2000 companies that have an expected CAR of over 25 percent at 5.0x.

Finally, investors who still insist on buying the stock may find better opportunities to do so in the future given the volatile nature of small-cap stocks.

Bottom line, the analyst is bullish on the company's prospects and leadership position but investors should "want to be disciplined on valuation."