Oblique Walmart CEO Reference Sent Stock Soaring Last Year, but SeekingAlpha Analysts not Impressed

SCDigest doesn't focus very often on the stocks of companies involved in the supply chain market, but some recent analysis of "invisible bar code" technology provider Digimarc on the investing web site SeekingAlpha that caught our interest in a slow news week for RFID and Internet of Things (IoT) technology.

We've written about Digimarc a few times in the past, primarily coming out of our annual coverage of the National Retail Federation trade show in New York City each January, where Digimarc has exhibited the past two years. (See Cool New Technology Called Digimarc Creates New Category of Automatic Identification).

Supply Chain Digest Says... Many see a lot of value in Digimarc's portfolio of some 1200 patents, which it says some have claimed is the most valuable collection of such patents in the world. What do you say? Click here to send us your comments Click here to see reader feedback

The company is some 20 years old, and invented a way to put a readable code inside anything printed by somehow manipulating the color pattern in a way that can be read as data by a smart phone camera or a traditional imaging scanner (with the Digimarc app), even though it is unobservable by the human eye.

In fact, the company can even embed a silent Digimarc in an audio steam, among other media.

For nearly all of its life, Digimarc, which is headquartered in Oregon, made its living by providing technology to various central banks as a means of currency valuation.

But in recent years, it has been expanding iton other areas. For example, some magazines are now using Digimarc codes in printed images that operate similarly to how use of a QR code works – but without the unsightliness ( in the view of some) of a large QR code on the page.

So readers could scan the image of a food dish with their smart phones and be taken to the magazines web page containing the recipe, or on-line coupons from a magazine advertiser.

But what seems to have investors pumping up small cap Digimarc's stock price is its potential in the consumer goods-to-retail value chain – as a UPC bar code replacement.

Literally dozens of Digimarc UPC bar code equivalents could be embedded in a product's packaging, such as the label on a can of soup. A Digimarc-enabled scanner at point-of-sale could thus read the code at virtually every angle, unlike the UPC, for which a store associate has to orient the product the right way to get a read.

Digimarc claims retail scanning in a grocery or mass merchandise type environment is up to 50% faster using its technology than traditional UPC codes. In fact, Digimarc set some sort of record at the NRF show in 2014 for fastest UPC scans, with a Guinness Book of World Records auditor there to authenticate the accomplishment.

The company had 2015 revenues of just $22 million, down a few million from 2014 and some $12 million from 2014's $34 million in revenue. That decline came primarily from the end of a licensing deal with a company called Verance that was using Digimarc technology for audio.

Digimarc lost $18 million for all of 2015, on heavy spend in R&D and sales and marketing. It burned through about $9 million in cash.

Nevertheless, it has seen its stock price as high as $49 or so per share in the last year, though it has fallen to about $27 per share recently. That gives it a market cap of about $240 million, or more than 10 times revenues – and that's after seeing its stock price cut almost in half since last summer

What has investors so excited? The chance that Digimarc will drive big license revenues from its technology for million of items sold through retail as the UPC replacement – even though it charges just 50.00 per SKU per year for the service after an initial set-up fee – and that's at rack rates, before volume discounts.

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But last June, Walmart CEO Doug McMillon noted in an Instagram post that "Inside Walmart's Lab 415-C, our associates are working on some incredible innovations - technologies like invisible watermarking could transform the way our customers check out."

That sent Digmarc's stock price up 14% the next day - even though McMillon did not mentioned Digimarc by name.

Regional grocer Wegman's has been using the Digmarc bar codes on its private label goods for at least a couple of years, though details of the program have been sparse.

Then in January, Digimarc and standards organization GS1 US - manager of the UPC code – announced a partnership, in which GS1 has created what it calls a "digital watermark," under the banner of a new "DWCode."

GS1 says that "this DWCode will be a peer format to UPC, GS1-QR, RFID w/EPC for product identification using GS1 Standards." It also says it will operate a portal, educate and support its membership in their adoption and use of the DW Code.

The DW code is in fact a Digimarc that will encode a given product's GTIN number and consumer product information. Under the arrangement, a GS1 member company applies for a barcode unique identity, and then that code number is shared with a one of several potential "pre-media vendors." Those vendors, certified by Digimarc, have the specific software that embeds the code into the package design and ultimately print files. For this service, GS1 will levy an annual charge, similar to the fees it has historically levied to obtain a UPC number and individual

So, GS1 will  become potentially an important channel for Digimarc.

But none of that much impresses analysts from investment firm Alpha Gen Capital, which took a look at Digimarc as a potential investment under the title of "Digimarc Is The RFID Craze All Over Again."

The piece does note that many see a lot of value in Digimarc's portfolio of some 1200 patents, which it says some have claimed is the most valuable collection of such patents in the world. Somehow, that in part ties in with what some claim is a huge opportunity for the company "as one of the key beneficiaries of the Smart Home and Connected World," though we're not quite sure how.

"Ultimately, we think the current UPC code works well and is low-cost, something retailers want," Alpha Gen Capital wrote. "In addition, QR codes are available for more information detail on product and services, which is also low-cost and working well."

It adds that "The hype has been from the billions of potential application uses from currency, mobile advertising, improving the speed at retail checkout, digital media distribution, and enhanced security across the digital platform" pontential it finds somewhat dubious.

In addition, one of those applications faces stiff competition from Amazon.com's Flow technology, which lets consumers take a picture of an item with a smart phone and access additonal information, similar to an app Digimarc has called Discovery.

"We think shares of Digimarc offer investors exposure to hype without substance," the analysis concludes, comparing Digimarc to the overheated expectations from RFID more than a decade ago.

But many commenters on the site pushed back hard on this analysis.

Several note that a large number of hardware companies, such as Datalogic, NCR, Honeywell, Zebra, and HP that are releasing systems that support scanning Digimarc bar codes. The new Kraft Heinz company has also shown some support for putting Digimarc's in its packaging.

Another says Digimarc will soon be a billion dollar company and a $100 stock, and one more notes that a large consumer products company such as Unilever, which has some 50,000 SKUs, would end up paying millions in recurring revenues to the company if it embraced Digimarc technology.

Who's right? Who knows. You can read the interesting full analysis and the commentary here: SeekingAlpha analysis on Digimarc.

What are your thoughts on the promise of Digimarc? Ready to take over the retail world, or way over hyped? Let us know your thoughts at the Feedback section below.

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