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Technology is in a sweet spot where new products are being introduced with incredible frequency. From an investment standpoint this is fantastic. There is no longer a decade between significant or disruptive new technology themes; now we are presented with new investment ideas every 12-24 months. This is a direct consequence of fundamental advancements in the technology itself. Computer simulation and modeling software, rapid prototyping along with other advancements of product development have hypercharged product introduction timelines.

When I started researching companies it was often easy to get excited about a technology that may not make a meaningful impact for years to come. In spite of significant prospects anticipated, the stocks would languish for extended periods, messing with my need for immediate gratification, and, worse, tying up capital in nonperforming assets. Oh opportunity costs! Currently, new technology products appear offering tremendous investment opportunity with great regularity. The most recent theme to pique my interest is mobile commerce. I have identified 3 names you may not be aware of that are well positioned to benefit.

The Mobile Wallet

We are headed for a cashless society. The majority of daily bill paying transactions has already moved to the internet and it is a major convenience. It only makes sense that the final step in the transition to a truly digital society is the point of sale (POS) transaction. To a large extent this has already occurred with credit and debit cards but to make this entire process seamless all those functions are about to be incorporated into your mobile device. A short range communication technology called Near Field Communications (NFC) will facilitate more sophisticated transactional capabilities between mobile devices and POS terminals/receivers.

The transaction market is very lucrative for the companies that offer consumers payment services. VISA (NYSE:V) and MasterCard (NYSE:MA) have developed into financial behemoths facilitating credit and debit card transactions for consumers. Now everyone is vying for a piece of the new NFC wireless transaction pie. Visa is developing applications for NFC-enabled wireless payments using enhanced memory cards. MasterCard is beginning to offer its PayPass service for NFC-enabled phones. Wireless providers AT&T (NYSE:T) and Verizon (NYSE:VZ) are teaming up with Discover Card to compete with Visa and Mastercard and Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) are also rumored to be getting in on the competition as well. Here are small cap companies that should benefit from these developments.

The Transaction

On Track Innovations (NASDAQ:OTIV) is a global leader in contactless smart card solutions for homeland security, payments, electronic passports, national IDs, petroleum payments and other applications. From the company’s website:

OTI’s technology offers commercially available, field-proven, contactless solutions, based on OTI’s significant patents and intellectual property covering the entire value chain, including manufacturing techniques, product design and applications. OTI delivers cards, readers, operating systems and complete solutions that are scalable, offering high functionality, security and flexibility.

OTI supplies key components to contactless payments programs developed by the major card associations – MasterCard’s PayPass, Visa PayWave, Discover Zip and ExpressPay from American Express. OTI supplied solutions for more than 20 million cards and 130,000 readers in projects around world in support the MasterCard and Visa’s global contactless EMV applications and the US market.

The company recently released a new NFC product called COPNI (Contactless Payment and NFC Insert) for mobile phones that attaches to the existing SIM card and enables mobile wallet solutions including secure NFC transactions. OTI indicates in the associated press release that it is already in advanced discussions with several mobile operators and that COPNI supports existing contactless payment applications from major card associations, mass transit ticketing (with MIFARE support) as well as loyalty programs and other proprietary programs.

The company has exposure to a variety of other interesting secure wireless microprocessor based markets as well as mobile wallets. These include parking payment solutions, Secure ID and petroleum payment solutions. All of these markets offer growth opportunities for OTI. In the most recent quarter the company reported nine month GAAP profitability on 93% revenue growth to $43.6 million. The balance sheet is solid and projections for next year are for full year profitability on revenues of $60 million. With a market valuation of just over $80 million and 54% gross margins any increased revenue derived from NFC should significantly drive bottom line profitability. If NFC takes off like the big players in the space are betting, OTI’s shares should take off as well.

Enhanced Digital Marketing

Once retailers have consumers using mobile wallets on their phones all efforts will be focused on exploiting new marketing capabilities. If consumers can transact instantly, companies will attempt to capitalize by tying online commerce and promotions into traditional commerce and marketing. Businesses can now embed additional complementary online information/marketing in traditional advertising and environments to expand a consumer’s purchasing options. One way to do this is with digital watermarking technologies and one of the leaders in the space is Digimarc (NASDAQ:DMRC).

From the company’s website:

Digimarc technology can transform print ads, posters, product packaging and more into an interactive media using a mobile phone. Consumers can use the handheld devices they use daily to instantly read the watermark in printed images, logos and other graphic elements and automatically connect to additional information on the product or service. The watermark includes a digital identifier that links to a database to enable any number of different actions — communicate pricing and where to buy locations, provide information on complementary products, engage the consumer in an interactive contest or game, or complete the sale by linking to the company’s web site.

This is just one aspect of my thesis on Digimarc as a strong new technology investment. Digital Watermarking has many applications in a digital economy beyond embedding additional information in print and other media. Digital watermarking is a critical technology for securing and tracking online content. As content continues to shift to the net and P2P sharing of media overwhelms conventional outlets like Apple’s iTunes and Netflix (NASDAQ:NFLX), securing and tracking usage of digital properties like film and music and software becomes critical to protecting ownership and compensation. Digital Watermarking offers a compelling solution and company’s like Neilson are already using Digimarc’s technology to track online content usage.

Digimarc is a leader in the space with over 600 patents and partnerships with leading media companies like Nielson, Adobe (NASDAQ:ADBE) and Thomson. Digimarc was profitable in the most recent quarter and is projected to be profitable for full year 2011. The company has over $40 million in cash and no debt. With a market cap below $300 million this new technology leader is blazing new trails in tracking and securing content usage and adding expanded content offerings to traditional media and commerce. Digimarc looks like a nice acquisition candidate for a large technology/security company and a company that can grow on its own merits into a much larger technology leader in the new digital economy.

Securing the Transaction

One obvious issue arising from the transition to mobile commerce is security. We have discussed securing content and the wireless transmission of the transaction between device and receiver but now we need to secure the consumer. This is where I am looking to biometrics; Authentec (NASDAQ:AUTH) offers the smallest fingerprint reader with navigation capabilities for mobile devices. This is one of the last public biometric security companies left after recent acquisitions of both L1 Identity and Cogent both at significantly higher valuations.

Authentec has lagged in the past but I believe this is about to change. The majority of commercial activity in the biometric space to this point has been large scale commercial or government deployments for securing agencies or organizations. The consumer market for these devices has been negligible. Now that is about to change as the consumer is faced with new options like mobile wallets in cell phones that require an added layer of security. This is where Authentec is well positioned.

Analysts believe revenues will grow 55% next year to about $70 million. Management has already indicated it expects momentum to build in 2011 as design wins start to come to fruition. Being one of the last independent publicly traded biometric companies, with strong projected growth, it may not stay independent for long. Either way the need to secure new NFC enabled mobile devices for consumer transactions should drive growth for Authentec and the share price significantly higher.

Disclosure: I am long OTIV, DMRC, AUTH.

Source: Three Small-Cap Tech Stocks Poised to Benefit From Mobile Commerce