Near Field Communications (NFC) has been the topic de jour in mobile for the past year. According to the NFC forum, NFC makes life easier and more convenient for consumers around the world by making it simpler to make transactions, exchange digital content, and connect electronic devices with a touch. NXP Semiconductor (NXPI) co-invented the technology in 2002 and is clearly the industry leader. Nine months ago neither Broadcom (BRCM) or Qualcomm (QCOM) had a NFC solution; now both espouse their capabilities. It is believed that this technology will be integrated in most mobile phones over the next few years.
Investors are chomping at the bit for NFC. Take a glance at a four-year stock chart of almost any semiconductor company providing IP to the mobile phone industry and you will understand why. In December, when NXP announced a partnership with Google (GOOG) to provide NFC, the stock took off. From the time of the announcement until NXPI’s fourth quarter conference call on February 15, the stock price increased 57%. During the conference call the NXPI’s CEO tempered investors' enthusiasm with conservative guidance and made it clear that NFC was a second half of the year story. Since then the stock is only up 6.7%. The rumors of Apple (AAPL) delaying adoption of NFC until 2012 haven’t helped either.
Google’s announcement of Google Wallet on May 26 has thrown more cold water on the stock. Since then, NXPI is down 6.5%. The market is also down 1.5%, but NXPI is clearly under performing. I believe that after the Google wallet announcement, investors began realizing that this may end up being a late 2012 story. The reason being that as an alternative to a credit card – NFC -- is just too complicated. Merchants will need to upgrade their existing point of sales terminals with NFC-enabled ones. NFC chips will need to be installed in phones. Credit card companies will need to process the payments.
Google has partnered with several companies to begin a trial this summer. Citi MasterCard (C) has signed on as a payment processor. I assume that means it will work with a Bank of America MasterCard (BAC), but if you use a Visa (V) or American Express (AXP) you are out of luck. Apparently, it also works with a Google pre-paid card. Sprint’s Nexsus (S) is the only phone that will work. So phones using Verizon (VZ) or AT&T (T) need not apply. However, there is some kind of NFC-enabled sticker than can be attached to non-Nexsus phones. Finally, the merchants have to accept the payments. Partnering with Citi and its PayPass service is supposedly a good start, but you can see how complicated this is.
I am not sure how long this trial is going to run. I am assuming three months, but it could easily run longer. Additionally, Google is being sued by PayPal over claims that it stole trade secrets. Finally, Google has to convince the public this method is better than simply whipping out a credit card ,,, not to mention security concerns. So you can see how broad adoption could be a ways away.
Another problem for NXPI is that the longer adoption is delayed, the higher the probability of Broadcom or Qualcomm offering an integrated solution that is smaller, faster and lower powered. These companies also provide more cost competition. Along with being the new guys on the block, their designs may be much more flexible than NXPI’s solution. I wouldn’t be surprised if Apple engineers aren’t sitting down side by side with Broadcom or Qualcomm’s engineering fine-tuning a solution specifically for Apple.
NXPI still has many advantages, but I believe the market is starting to understand that this won’t be a slam dunk for NXPI.
Disclosure: Long NXP Semiconductor and Apple.