There is an emerging ecosystem that frequently and periodically goes on and off of the radar. The spottiness of this emerging trend is likely due to its speculative nature, but to some investors, including me, this trend isn't as speculative as it may appear on the surface. With a little digging you can find that the road is being paved for NFC technology to get some serious traction. Near Field Communication (NFC) technology 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. In order for NFC to be a player in the mobile transaction/communication field there are a few things that need to first be established: hardware, processing, software, and adoption by the consumer. The following are the companies who stand to benefit the greatest from the new technology:
Verifone (PAY) - Most people want to jump straight to the sexy part of a new technology, the cool apps and new software, but before any of these technologies can become useful and mainstream, there must be infrastructure. Verifone is a global leader in secure electronic payment technologies. They supply the terminals to businesses globally to process payments. NCF technology has two separate hardware components: the chip that contains user information, such as credit card, buss pass, or gift card, and the point of access that will communicate with the chip. Verifone stands to benefit from NFC through mobile transaction technology, via the deployment of next generation payment systems.
Verifone also believes that this technology could extend beyond the replacement cycle and create opportunities to wrap managed services into new products due to their complexity. As more NFC enabled devices come onto the market, and user demand for contactless transactions grows, it is inevitable that retailers upgrade their current devices to meet the new standard. In Verifone's Q4 2011 conference call, it was announced that they have delivered to 12 of the 13 single top merchants listed on the Google Wallet website. In the same conference call, Verfone's CEO quoted a customer when discussing ordering for 2012 saying, "I don't know what the future is for sure, but I know NFC is going to be part of it, and I don't want to be flat-footed when that day arrives." Verifone has come under fire lately in the marketplace with a dramatic decline from 55 to 32 and change, presenting what I believe to be a decent entry point for a company who is surely an integral part of this emerging technology.
NXP Semiconductors (NXPI) - For those of you that live in a box, NXPI Semi is the leading NFC chip provider in the industry. With over 130 key design wins, management frequently boasts that they have "Intel like" market share in the NFC chip market when responding to analysts on conference calls. Below is a list of OEM manufacturers listed as "key" customers in the identification category of NXPI's business which includes secure identity, secure transactions, and tagging and authentication:
• Avery Dennison
• SDU Identification
Source (NXPI 2011 10k)
Granted other semiconductor companies have recently began manufacturing NFC chips, they are far behind the 8 ball already. NXPI's close collaboration with Google (GOOG) in developing the NFC technology for the mobile wallet application has given NXPI a clear advantage, with the proverbial "foot in the door" with the most popular smart phone operating system in the world. I also believe there to be further benefit as far as securing market share for NXPI when the GOOG, Motorola Mobility (MMI) transaction is completed and Google has complete control over its smartphone manufacturing.
Mobile transaction processing is only one portion of the high performance mixed signal identification market. Also included in this infrastructure build out is: e-government, transportation and access management, smart card readers, and radio frequency identification tags and labels. NXP Semiconductors supplies to approximately 85% of worldwide e-passport projects, and our MIFARE product is used in approximately 70% of the public transport systems that have adopted electronic ticketing, as of their 2011 annual report. This segment posted an astounding 18.5% year over year growth, which included the near term underperformance of mobile payments, and the drastic impact of the floods in Taiwan.
With a little digging you will find that NXP Semi stands to be one of the clear winners from the transition to contactless transactions, and identification in the future NFC build out.
As far as I am concerned, these 2 companies will be the clear winners in the infrastructure build out for the NFC ecosystem. As far as the ancillary beneficiaries go, rest assured, there will be many. There is a horse race for the mobile transaction processing business that will occur on the back end of the transaction with heavy hitters including Mastercard (MA), Visa (V), Ebay's PayPal (EBAY), Citigroup (C) and Discover (DFS).
From an operating system standpoint, Google's Android is the first mover to the space with its Google Wallet, which is being maliciously attacked by the coalition of ISIS formed by AT&T (T), Verizon wireless (VZ) and T-Mobile. Not to mention there is the 800 lb gorilla in the room of Apple (AAPL). Apple recently announced their new Passbook application for IOS6. Passbook is Apples way of beginning to relieve the customer of the burden of carrying loyalty cards, tickets, and among other things, retail coupons. There is much speculation that NFC technology will be included in the next iPhone to complement this new technology. I'll let you make that conclusion for yourself.
While the true winners and most profitable beneficiaries from the emerging NFC infrastructure build out will only be known in the future, as investors, it is our job to speculate which they might be. With some education on the industry and it's main themes, one can derive their own conclusion on which will be the standout winner, but for now this list should be a good start.