On Track Innovations-NFC And Credentialing Will Drive The Future

Jul.17.12 | About: On Track (OTIV)

Recently, Samsung (OTC:SSNLF) reported that they are switching their employee credentialing to Near Field Communications (NYSEMKT:NFC) equipped smartphones. Shortly afterward, I received an email communication from Jay Meier, former Senior Vice President for Investor Relations and Business Development of On Track Innovations (NASDAQ:OTIV). Jay very succinctly explained how NFC works, which is as follows:

"NFC is just an evolution or application extension of contactless smart card technology. In fact, the standard for NFC utilizes ISO/IEC 14443-A/B, the international standard for contactless smart cards. Thus, NFC "is" simply a contactless smart card that's been wired to a SIM-card and embedded in a mobile handset. Thus, we can further describe an NFC module inside a smart phone as a "dual interface smart card". The "dual" implies bi-modal communication signal paths between an integrated circuit (IC) chip (smart chip), and a reader device. The bi-modal communication paths are "contact" and "contactless". Thus, a dual-interface smart card is a smart card that communicates either wirelessly or wired. To follow, an NFC module is effectively a dual-interface smart card, embedded in a handset for the purpose of transacting data between the smart chip and a reader device, like a Point-of-Sale (POS) terminal or, in Samsung's use case, a doorway to enter a Samsung building or computer network. Now, recognize that NFC is a "standardized" technology and all NFC modules are alike. Thus, if one NFC module violates a patent, they all might."

For over 22 years, OTIV has been developing technology directly related to the NFC industry. They have over 100 patents and patents pending which I believe to be the core of NFC technology, and in March 2012 filed a lawsuit against TMobile for patent infringement. In a recent Seeking Alpha article, I wrote that OTIV and TMobile are in settlement talks, which is highly unusual in the early stages of a lawsuit. One can speculate that TMobile wants this suit to "go away" quickly, as they are probably in violation of the patent (in my opinion). This settlement could be lucrative for OTIV, and set a standard value for future licensing of OTIV's technology.

Jay concludes his email by saying:

"People, including Wall Streeters, fail to grasp just how big the NFC opportunity is, even just in the United States, where that "Contact/Contactless Data Transaction Card" patent might have some bite."

I believe that OTIV is strictly a play on their patent portfolio. I liken OTIV's extensive NFC patent portfolio to Qualcomm's (NASDAQ:QCOM) CDMA technology for cell phones. Even if OTIV's patents are 1/10 the value of Qualcomm's, monetization of OTIV's patents could lead, in my opinion, to a 5 to 10 fold increase in the stock price of OTIV. With a market cap of $45M and and enterprise value of $18M, this stock is greatly undervalued trading at a price per share of $1.40.

Disclosure: I am long OTIV.