Apple: NFC And Mobile Payment Processing Are Just Around The Corner

| About: Apple Inc. (AAPL)


We are increasingly confident that the next iPhone will be NFC-enabled.

Apple is rolling out NFC-enabled payment terminals in its US stores and signed a deal in China where NFC is becoming a standard with China UnionPay.

A NFC-enabled iPhone should kickstart Apple’s expansion in the mobile payment processing business.

Apple has an incredible opportunity to monetize the mobile commerce business as transactions made through an iOS device account for 14% of global payment transactions.

We estimate the impact of such a business on Apple’s stock price at $46-66 per share.

In our March 12 article, we said that the iPhone 6 would be NFC-enabled. As a reminder, NFC is a low-power wireless technology allowing smartphones and other devices to establish radio communications with each other when they are held a few inches from each other. We added that a NFC-enabled iPhone would probably kick start Apple's (NASDAQ:AAPL) expansion in the mobile payment processing business.

Opinions are divided as to whether Apple will endorse NFC. Some readers and contributors on SA argue that Apple does not need to adopt an international standard as Apple traditionally develops and imposes its own standards and that iBeacon/Bluetooth Low Energy can fit the bill.

We think that Apple won't be able to impose its own standard this time around due to the importance of the payment issue for consumers globally and that Apple will have no other choice than to embrace NFC if it does not want to be sidelined from the huge Chinese market where NFC is becoming a standard.

We believe that the very recent newsflow supports our thesis.

Apple adopts NFC…in its Apple stores

According to various reports, Apple has started in the last days to revamp its point-of-sale (POS) systems in its US stores. Apple is said to use as POS terminals iPhone 5s devices encased in a VeriFone (NYSE:PAY) sleeve that accepts EMV transactions (chip-and-pin payment cards) and contactless payments…through the NFC technology.

NFC is an intriguing addition to Apple's POS terminals considering that the iPhone is not (yet) NFC-enabled and that many analysts and investors do not believe that Apple "needs" to have this feature in the iPhone 6. If we assume like many analysts that Apple will not ship a NFC-enabled iPhone in coming months, the only customers able to make a contactless payment in an Apple store will be those owning a Samsung (OTC:SSNLF) or HTC (OTC:HTCKF) device…That does not make any sense. And obviously, this strengthens our view that Apple will go NFC with its next device.

Still not convinced?

According to investment newswire Brightwire, Apple has struck a deal with China UnionPay, the country's interbank network, related to a mobile payment service and is likely to incorporate a NFC payment function in the next iPhone.

This deal follows the agreements reached recently by China Mobile (NYSE:CHL), China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU) with China UnionPay on standards for payment systems based on NFC. This is perfectly in line with our scenario that NFC is becoming a standard in China and that Apple has no other choice than to endorse it if it does not want to be sidelined from the Chinese market.

Payment processing could become a significant market for Apple

We are not sure that NFC will be a game-changer for iPhone sales. But NFC would make it easier for Apple to expand in the mobile payment processing business, a move that is now expected by many analysts and investors. Indeed, NFC is an international standard and such a label can be of paramount importance when recruiting users.

As we said in our previous Apple article, the revenue and earnings opportunity is huge. According to research firm Adyen, the share of payment transactions taking place on a smartphone or tablet grew to 19.5% in December 2013 from 12.6% in December 2012

Close to 73% of these mobile transactions took place on an iOS device (vs. 27% on Android devices), meaning that an Apple device was used in 14% of global payment transactions! Therefore, Apple has an incredible opportunity to monetize the mobile commerce business.

The ramp-up of a mobile payment processing service would obviously take a few years but Apple has everything it needs to succeed: 800m iTunes accounts, loyal and high-income customers, technology know-how and a strong brand.

Potential impact on Apple' stock price

We believe that PayPal, owned by eBay (NASDAQ:EBAY), is a useful reference: with 150m active users, the company had $6.6bn revenue in 2013 and a 25% EBITDA margin and is expected to grow its revenue close to $8bn in 2014. According to analysts, the company's valuation is around $40bn.

Assuming Apple converts only 20% of its customers and these customers do a similar number of transactions than PayPal users, the payment processing service could add $40bn to Apple's market cap (i.e. $46 per share).

But this is a very conservative scenario: Apple could convert a much higher number of users and importantly, these users would have the possibility to use the service at any time (in a supermarket, in a gas station…). The number of transactions could be significantly higher then, and Apple could end up competing with Visa (NYSE:V), MasterCard (NYSE:MA), Amex (NYSE:AXP) and Discover Financial (NYSE:DFS).

Our scenario here is that Apple first adopts the PayPal model (PayPal offers 2 payment options, via a credit card or via a bank account) and, in the future, focuses on payments via direct bank accounts (like Visa and peers) which are more profitable.

The combined valuation of credit card companies is around $340bn, and $380bn when including PayPal. If we assume that Apple grabs a 15% share of the total payment processing market in the future, the impact on Apple's valuation would stand at $57bn, or $66 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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