From 2012 to 2016, smartphone activation is projected to grow from 220 million to 1.75 billion, according to market research firm Maravedis. This exponential growth underscores the potent financial incentive for investors to identify and invest in companies that may be beneficiaries of the wireless broadband revolution. Organizations like Apple (AAPL) and Google (GOOG) are already household names in the handheld sector with their hot-selling handsets, but the dragnet is also on to discover companies whose products reside inside the popular Android and iPhone mobile computers.
If you are looking for companies that may gain traction once mobile payments become a norm with handheld devices, then NXP Semiconductors (NXPI) may be tailor-made for your portfolio. NXP is the worldwide leader in Near Field Communications (NFC) as reported in its most recent annual report, and from a variety of other sources I have read. In fact, it invented the technology along with Sony (SNE) ten years ago. With an NFC-enabled device, you'll be able to wave your Android or iPhone close to a payment terminal, and complete your transaction with companies such as Visa (V) or MasterCard (MA) without swiping your credit card.
According to MarketResearch.com's new Software and Services market report: "Currently only 5% of all smart phones and mobile devices are NFC-enabled. It is estimated that NFC support for mobile devices will increase in the next 5 years, and, by 2016, 46% of smart phones will be NFC-enabled. Revenue in NFC is expected to grow at an estimated compound annual growth rate (OTCPK:CAGR) of 35% from $7,686 million in 2011, to $34,515 million in 2016. They predict that the most attractive segment is mobile payments...".
In addition to NXP's pioneering efforts in the field, it also has the advantage of being the only NFC player that provides security, protocol stack, and RF Radio to prospective customers, with one-stop shopping for three critical elements. Ownership of the largest patent portfolio in the sector is also in its favor. As of date, OEMs have selected NXP's NFC technology for more than 130 mobile devices. Most of these handheld mobile computers utilize Google's Android operating system.
NXP's annual report expounds this by discussing its relationship with Google: "On December 6, 2010, we announced a strategic collaboration with Google to provide a complete open source software stack for NFC integration and validation on Gingerbread, the latest version of the Android platform. Google also integrated our NFC controller into its newly launched Nexus STM phone, co-developed by Google and Samsung...".
With Android accounting for 48% of all smartphones shipped in 2011, NXP could strike it rich if its nascent technology takes off as projected. Then there is also the prospect of Apple with an NFC enabled iPhone5 rumored to be released later this year. Although the phone is under wraps, and nobody knows who the semiconductor suppliers will be until after it hits the street, NXP may very well be the vendor of choice, based not only on its superior technology, but also because it already has a relationship with Apple.
In going through the NXP annual report, the company lists Apple as one of its OEM customers. NFC standard chips (non near field communication) are used in some of Apple's desktop and laptop computers. I would think that having an already existing business arrangement with it would bode well to seal a deal. Android and iOS are in a head-on collision for worldwide market share, and Apple has a reputation of putting out a quality product. NXP NFC chips would fit that bill.
There is intense economic interest in Near Field Communication, and competition has come out of the woodwork attempting to steal NXP's thunder. In a February 10, Motley Fool article, reporter Evan Niu states: "Some very capable rivals are threatening NXP's spot at the NFC forefront. Rival Broadcom (BRCM) announced that it was getting in on the NFC action late last year. Chip king Intel (INTC) is "highly interested" in NFC, recently partnering with Inside Secure for that reason. Mobile processor maker Qualcomm (QCOM) is interested in integrating NFC into its Snapdragon lineup.".
Although NXP had its IPO in August of 2010, it is not an up-and-comer in the semiconductor industry. It is a 2006 spin-off from Philips (PHG) with a 50-year track record. It works with a laundry list of heavy hitters in the technology space, and 57% of its revenue in 2011 was derived from Asia/Pacific (excluding Japan). Some of its ten largest customers include Apple, Nokia (NOK), Samsung, and, ZTE. It is well positioned in the mobile market.
If we look at the numbers for NXP, they don't make for a pretty picture. The Street has a flat out Sell on the equity due to a two-year declining earnings pattern. Right now, growth for the company is about zero. NXP's trailing P/E Ratio is 16, and, it's forward P/E Ratio is 14.8. It also carries a lot of debt. On the positive side, Price/Sales is 1.42. It currently trades at $23/share, right in the middle of it's 52-week range of $13-$35. However, as that age-old investing conviction goes, it's not where it's been, it's where it's going.
My 2012 investing strategy is to purchase smartphone auxiliary plays like NXP Semiconductors. Right now, its inclusion in Android devices hasn't budged the security, but Near Field Communications is in its infancy. My impression is that if indeed NXP chips are included in the iPhone5, the stock may move higher based on investor psychology.