Investors get mixed signals on RFID
Technology evolving rapidly; acceptance still slow
July 7, 2004

By Chris Kraeuter, CBS.MarketWatch.com

SAN FRANCISCO (CBS.MW)-- Investors seeking to capitalize on the growing use of radio-frequency identification devices may struggle to find clear buy and sell signals, analysts say.

"It's too early to tell who has the inside track," Red Oak Technology Select Fund (ROGSX: news, chart, profile) manager Doug MacKay said. "There's kind of a hodgepodge out there. Everyone is taking a different approach."

RFID, as it's called, has caught investors attention because of its planned usage by such big spenders as Wal-Mart (WMT: news, chart, profile), the world's biggest retailer, and the Department of Defense, with an annual budget of $400 billion, among others. See retail-impact story.

An RFID tag, which consists of a microchip and antennae, can be embedded in everything from shipping pallets to clothing and tires to transmit a package's exact location and contents. Its promoters foresee the elimination of inventory theft, tighter supply lines and replacement of the bar codes. See overview story.

Aberdeen Research Vice President Tom Ryan, who just published a major study about RFID implementation, said the path that the technology is traveling to mass adoption is unlike anything he's ever seen -- and that's not a good thing.

"What we have here is a technology that is not very robust, has not had a whole bunch of acceptance, certainly hasn't demonstrated industry strength and that no one knows how to use," Ryan said. Yet, he added, there's growing, widescale market demand.

'Better-than-fair shot'

Many companies are emerging as potential suppliers of the technology. The problem for investors is in separating the players from the pretenders. Red Oak's MacKay began looking at RFID companies a few years ago. He decided to take a "basket approach."

"We tried to find who will have a better-than-fair shot of participating in the market because of existing relationships and exposure to industries that will roll out RFID in the early innings."

His fund holds shares of Symbol Technologies (SBL: news, chart, profile) and Zebra Technologies (ZBRA: news, chart, profile). Symbol makes RFID portable readers and scanners and Zebra makes RFID label printers and encoders.

Other companies currently involved in RFID hardware include Avery-Dennison (AVY: news, chart, profile), Unova (UNA: news, chart, profile) and Matrics. Chipmakers involved with RFID include Philips (PHG: news, chart, profile), Texas Instruments (TXN: news, chart, profile), STMicroelectronics (STM: news, chart, profile), privately held Alien Technology, WJ Communications (WJCI: news, chart, profile), and RF Micro Devices (RFMD: news, chart, profile).

Technology integrators include Checkpoint Systems (CKP: news, chart, profile), Lantronix (LTRX: news, chart, profile), Axeda Systems (XEDA: news, chart, profile), and Savi. Software companies are also involved in RFID: Manhattan Associates (MANH: news, chart, profile), Tibco (TIBX: news, chart, profile), WedMethods (WEBM: news, chart, profile), and Datamirror (DMCX: news, chart, profile).

Further, Sun Microsystems (SUNW: news, chart, profile) and IBM (IBM: news, chart, profile) have both established RFID testing and research centers. Evolution

Those aren't even all the companies vying for RFID market-share. Large to small firms claim an interest in the emerging technology.

Investors should expect the RFID landscape to evolve rapidly and extensively as the technology becomes more standardized and it becomes more clear how it can be best applied.

"Typical of any technology in its infancy, most of the people who are leaders are small companies that will die or get absorbed," said Aberdeen's Ryan.

The largest companies -- like Philips and Texas Instruments -- are waiting to see what RFID requires before devoting too many resources to the market, he said. "When those guys jump in with both feet you'll know that RFID is finally accepted in a big way. They're in the business now, but they're letting other guys lead the way because they didn't want to spend a lot of money on a standard that was [to be used in the] U.S. only."

That makes it harder for investors to judge the true intentions and possible outcomes for companies.

MacKay said research is the key to cutting through the excitement.

"This area is clearly hyped and I think it is going to be very powerful," MacKay said, "but investors just need to be careful."

Chris Kraeuter is a reporter for CBS.MarketWatch.com in San Francisco.