The Near Field Communications (NFC) buzz was sizzling from the end of last year through the beginning of this year. Nearly every day there was talk about the next new thing. NFC was going turn our cell phones into credit cards and replace all of those loyalty cards bulging in our wallets. There were other applications bantered about, but mobile payments was the killer app.
Stock market participants chose NXP Semiconductor (NXPI), a leader NFC chips, to express their opinion. The stock ran from $14 in December to a high of $34 in February – far outpacing the market. However, NXP’s February 15th earnings release was a buzz killer. Its CEO gave a rather conservative forecast and made it clear that NFC was a second half of the year story. Wall Street took that out of NXP’s hide. When the market hit a soft spot in March, NXP led the downside charge, falling from $34 to $24. A move of -30% vs. the market -6%. It would recover and repeat the downward spiral again – hitting a low of $21 this past Monday.
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At one point this year, NXP was my second largest holding. I slowly sold off shares and found myself without any shares on Friday. On Friday, NXP closed up nearly 5% on 1.7 times average volume. There were also some big call option buyers at the August 22.5 and September 20 strikes. Why the change? I decided to buy a small speculative position and think about the reason why over the weekend.
Talking heads have been going back and forth on whether the iPhone 5 will have NFC capabilities. The majority are leaning towards No – with next year’s iPhone 6 being the first to have the capabilities. Adding NFC requires integration of a specialized chip to handle the NFC requirements. Since Apple (AAPL) only upgrades its hardware once a year, delaying NFC integration until iPhone 6 will put it 18 months behind Google’s (GOOG) recently announced Google Wallet. In this fast moving market, 18 months is an eternity.
Now it could be 2 years or more before the market is truly prepared for NFC based payments. Until the merchant support is ubiquitous and security issues are ironed out, the general market won’t embrace it. However, now may be an ideal time for Apple to release an NFC capable phone and unleash the developers to create innovative non-payment applications. Even though Nokia (NOK) is the red headed step child of mobile, this social business card app sounds interesting.
At some point, Apple is going to have to conduct a major proof of concept test program for payments similar to the Google Wallet testing. It will require thousands of people with NFC capable phones, hundreds of merchants as well as the credit card companies. In my opinion, Apple can’t do this under its traditional veil of secrecy. It has to see how the technology works in various conditions and that seems difficult to replicate in a tightly controlled test case. Releasing a NFC phone now gives Apple the flexibility to conduct testing 3, 6 or 9 months from now. Not releasing a NFC phone delays broad testing for an entire year.
1) I am not 100% convinced that NXP chips will be included in the iPhone. Broadcom (BRCM) and Qualcomm (QCOM) both have NFC capabilities. They can also integrate NFC into their other solutions, thus possibly creating a better design for Apple.
2) I believe that NXP will do well even if it loses the iPhone business. NXP will sell a ton of chips through its Google partnership. However, the Google business is already priced into to NXP’s stock price. The stock has actually sold off since the Google wallet announcement.
Disclosure: Long Apple and NXP. Short Google. Positions may change at any time.