One of the cool things about an investment research firm like Nanalyze is our longevity. We’ve been around for nearly 20 years now, and so we benefit from being able to draw on more than 2,200 research pieces. In effect, we have a unique dataset across a dozen emerging technology sectors. In that span of time, we’ve seen startups become multi-billion-dollar unicorns, eventually listing as a public company. We’ve watched companies pivot so many times that it makes you dizzy. And we’ve seen others evolve with interesting business models and technologies to match that they eventually create enough traction to merit a second look. Such is the case for a French company called SES-imagotag (SESL.PA), which has emerged to become the global leader in smart and connected digital labels and IoT solutions for physical retail locations.
About SES-imagotag Stock
We first covered this 30-year-old company way, way back in 2014 in which we referred to SES-imagotag as an e-ink pure play for retail stores. E-ink, more commonly referred to as e-paper, is the display technology for e-readers and also electronic shelf labels (ESLs), among other applications. E Ink (8069.TWO) is also the brand name of a Taiwanese company that is actually headquartered in the Boston area, as it was originally founded by some big brains from MIT. E Ink not only provides the ESL technology behind SES-imagotag’s retail IoT platform, it is also one of three principal shareholders in the company.
The second is SESIM, the French holding company owned by the management and employees of SES-imagotag. Rounding out the triumvirate is BOE Technology Group (000725.SZ), a Chinese semiconductor display and IoT solutions company with nearly $35 billion in 2021 revenue. You might have heard of some of its customers: Apple, Dell, HP, Samsung, and LG. Currently, the shares of BOE and SESIM are mingled in a joint holding company based in Hong Kong, split 80-20. Got all that? Oh, by the way, Qualcomm acquired a 2% stake in the company in 2019 in connection with a deal to develop IoT connectivity solutions for retail. So, make that four significant shareholders.
At the time of our previous article, SES was just Store Electronic Systems. It was still in the process of merging with one of its competitors in digitizing and automating shelf pricing tech for brick-and-mortar stores, iMAGOTAG. SES had a market cap of just $182 million and the stock had lost a quarter of its value over the 15 years it had been a publicly traded company. Today, SES-imagotag sports a $1.5 billion market cap and SES-imagotag stock is facing down the bear that has also attacked European exchanges surprisingly well.
What are investors so bullish on this pure-play retail IoT stock?
SES-imagotag IoT Retail Platform
Let’s start with the company’s technology, which automates shelf pricing using high-tech digital display tags, sensors, connected cameras, artificial intelligence for object recognition, etc. In 2018, SES-imagotag rolled out its magnum opus, the VUSION Retail IoT Cloud platform, which synchronizes prices, product information and marketing campaigns, and much more. The system monitors the shelves in real time, providing availability and location of products, ostensibly reducing waste and out-of-stock issues with inventory intelligence. The cloud-based system sounds infinitely scalable. For example, a retailer with 1,000 stores and 10 million ESLs could simultaneously update all prices in less than two hours. About 4,000 of the 30,000-plus stores that use SES-imagotag ESL technology are now on the cloud-based management system.
The company claims its automated pricing system can add 1% to 2% to a retailer’s profit margin. That might not sound like much until you consider that the world’s largest brick-and-mortar retailer, Walmart, has a net margin of just 2.4%. There’s also the sales pitch around freeing staff for other value-added tasks like customer service or sucking Purple Monkey Balls spliffs in the storage closet.
Shifting to a SaaS model
The VUSION Retail IoT Cloud platform represents the company’s slow shift to a software-as-a–service (SaaS) business model with reliable recurring revenue, along with what it calls value-added solutions (VAS). For example, something called V:Studio is a software collaboration tool that enables teams to create label templates that they can deploy across the operation in just a few clicks. There’s also something called V:Link for geolocating products on store shelves. V:Captana automatically detects stock-outs using AI and miniature wireless cameras. And so on.
SES-imagotag said VAS revenues increased 68% to account for 15% of its record $423 million in 2021 revenue. The company claims it is on track to reach 20% of VAS revenues by next year. That’s admirable and all, but the best SaaS stocks will get most or all of their revenue from subscription services. SES-imagotag has a long way to go.
Total Addressable Market for Retail IoT
Another hallmark of SaaS stocks is that they often only claim a small sliver of a rapidly growing total addressable market (TAM), offering lots of room to grow. In the case of SES-imagotag, we’re left with the company’s claim that the demand for digital labels could hit 10 billion units before the end of the decade. It estimates a current penetration rate of about 500 million electronic labels or about 5%. SES-imagotag says it has about 300 million ESLs deployed, giving it a 60% market share by that metric.
In dollars, the company thinks the TAM will be worth about $3 billion in the next five years. A related market for digital solutions such as shelf monitoring or stock-out detection that the company is chasing with its cloud-based platform could be worth up to $2 billion. So, we’re talking about a market with a ceiling of about $5 billion by about 2027 – not terribly big. SES-imagotag reported revenue of $285 million in the first half of 2022, a 41% increase compared to the same half-year period in 2021. Assuming a similar trajectory for the remainder of this year, the company will easily surpass $500 million in revenue, claiming at least more than 10% of the total addressable market, depending on how you want to slice and dice it.
Customers and Competition
Not surprisingly, SES-imagotag is driving that growth by going after the big fish first. The company says it has more than 300 major distribution groups among its customers, half of which are in the top 50 worldwide and around 30% in the top 250. More than a dozen of its biggest brands have deployed SES-imagotag technology to at least 1,000 stores each. Our mostly American audience won’t recognize the majority of names, because two-thirds of the company’s revenues come from Europe with the rest of the world accounting for the other third. However, North America is now the company’s fastest growing region, including a recently signed contract with Mattress Firm with 2,300 stores across the United States. That should help investors sleep well at night.
We don’t know much about competitors, except that SES-imagotag concedes that it faces “intense competition from international players, mainly from Asia.” In that regard, the playing field is pretty level, as the company outsources all of its manufacturing to China and Vietnam. Of course, repeated lockdowns during the Rona have caused plenty of supply chain disruptions, and China is no longer the cheapest place to make cheap stuff.
In addition to potential competition from Asia, we wrote about a Swedish company called Pricer (0H38.L), also back in 2014. A quick look at Pricer shows that it engages in a similar business – electronic shelf labels, AI-powered cameras to detect stock-outs, for example – but with a market cap of just $168 million and about $155 million in 2021 revenue. Revenue has been static and Pricer introduced its own cloud-based platform to manage IoT retail operations about two years after SES-imagotag. The French (and U.S., Taiwanese, and Chinese) company is clearly the top dog among these two.
Should You Buy SES-imagotag Stock?
SES-imagotag stock is certainly an intriguing pure play on retail IoT, combining many different solutions in one comprehensive platform. The company has a clear vision that it is paying off with some tremendous revenue growth. More importantly, that growth is not being fertilized in a pool of red e-ink: Net earnings are relatively flat, with very modest losses, and even about $2 million in net profit last year.
Our biggest red flag is the company’s heavy reliance on China. On one hand, the alliance with BOE provides a strong technology partner with access to the world’s second largest economy. But China’s recent freefall from open market policies does not produce warm and fuzzy feelings. Another issue is the relationship between China and the United States, which is clamping down on technology access, especially around computer chips. An IoT system monitoring U.S. stores with chips and cameras from China might raise a few eyebrows.
However, the really weird thing that SES-imagotag announced this summer did raise our eyebrows: The company’s board of directors approved the transfer of the 51% share that SES-imagotag holds in its joint venture in China in exchange for 9.5% of BOE-YiYun, a Chinese tech sector company recently spun off from BOE that “specializes in digital solutions for the culture, education and retail sectors.” It’s an obvious push to accelerate growth in China, where the technology might be more readily embraced. Politics and business make strange bedfellows.
Conclusion
We’re not quite ready to get in bed with SES-imagotag, as it already seems like an orgy and we’re not really into it. The company is definitely worth keeping an eye on (and one eyebrow raised), as it concurrently pushes into both the U.S. and China retail store markets. In the future, we would like to see more granularity in the revenue, especially as the SaaS model becomes more relevant to the bottom line. While the total addressable market is relatively small, we could see that expand in the future if the company eventually evolves its platform to support other autonomous store technologies.
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