For the last few weeks, I’ve been making a big fuss about NXP Semiconductors. I first heard of them back in May while perusing Engadget. At the time they were talking about a new IP-chip embedded in a light bulb that would let you control the level of light from anywhere in the world. The practical applications for this would be in the hospitality industry where hotels could control all the lights from one central computer.
I didn’t really have an opinion on whether or not that tech would be successful but it was something new and new means serious hype potential. Normally, in this situation, I look up the producer’s ticker symbol and make an on the spot decision whether or not I want to ride the hype train to profit city. Thankfully I did and I took notable gains for a few hours of trades. This practice of trading off primarily tech news would quickly become my standard strategy for day trading.
This, my first feature, is not about day trading but it is about NXPI.
Putting its Chips on the Near Field Communication (NFC) Bet
NXPI is one of the co-developers and industry leaders of NFC technology. Near Field Communication allows for mobile payment systems, file/data transfer services and many other device to device communications. It is projected that 1 billion NFC chips will be shipped in 2015, 400 million of those will be in our smartphones (roughly half of the smartphone market).
NXPI has a great start with NFC, as it supplies the NFC chips to point of sales vendors and in popular smartphones including the Nexus S, Samsung Galaxy S II and the soon to be released Android 4.0 toting flagship Google phone, the Galaxy Nexus. Google partnered with NXPI to push NFC using Google Wallet, a mobile payment platform developed by Google in partnership with MasterCard, Citibank, Sprint and many others. The hope is that Google’s decision to not take a fee on mobile payments will help retailers and banks to quickly adopt the platform. NXPI also provides Google with the NFC software adopted in Android 2.3 and showcased in Android 4.0 on the Galaxy Nexus.
Still, NFC is one of the smaller revenue generators in NXPI’s fast growing Identification Business which comprises such things as automatic fare collection, RFID tagging (e.g. Passports, livestock, retail) and anti-counterfeiting.
There are two big limitations hindering the widespread adoption of NFC technology.
- Retailers are weary of investing in and adopting this new payment method
- No integrated wireless chip
To get retailers to adopt NFC payment methods, a number of challenges must be met but one of them is surely to make the investment worth it. Google has pushed two major initiatives to get NFC adoption rolling and I’ve already mentioned both of them. The first is Google Wallet with which they have agreed not to eat into the retailer’s profits by taking a fee. The second is the newest version of Android, Ice Cream Sandwich (ICS). ICS innately supports NFC functionality, particularly in the realm of sharing files between devices. Both these features will allow Android users to pay for item using their mobile devices while applying coupons registered to the device’s account during the payment process. Also, major app developers have started releasing apps which use NFC, these include Angry Birds and FourSquare.
Phone makers want one integrated chip to feature all of the wireless capabilities including Wi-Fi, GPS and Bluetooth which would integrating NFC into mobile devices in a more cost effective manner. This is where NXPI is weak as it doesn’t have the resources to develop such a chip. Competitors are actively working on an integrated solution but that would not come to market until 2013/2014.
In the meantime, consumer demand for NFC and Google’s push to market will require a supplier of a standalone chip and that is where NXPI fits the bill. As already mentioned, NXPI is the undisputed leader of NFC and its partnership with Google should provide for a substantial revenue growth going into the next few quarters. After that, NXPI will have to find a way to compete in the mobile handset market against the integrated wireless chip makers. As NXPI does own patents on the technology, you can expect that NXPI will license out development of NFC chips in the future. This could provide more revenue to other parts of its Identification Business by increasing demand for compatible functionality from NXPI’s chipsets.
Today at 8:30, NXPI will be releasing their Q4 earnings report and quite frankly, it could go either way. The stock has really recovered from hitting a low under $12 a share, currently at $18.45. NXPI has over $4 billion in debt and over $800 million in cash. They are very susceptible to any poor market conditions as they don’t have the same ability to adapt to changing needs in the NFC space.
That being said, if you look at the stock’s movement over the course of the last year. NXPI hit a peak of $35 back in June from the hype surrounding the announcement of a partnership with Google. Failing to show major demand for NFC at that time, however, has lead to a drastic decline in the stock.
The gamble here is not whether or not NFC will become highly sought after. The gamble is how soon will it become adopted? With the pending roll out of Android 4.0, it could be much sooner than we imagined in which case you want to own NXPI stock. If the stock hit $35 on news of a partnership with Google, it would not be unfair to assume it could reach that level again when units are actually being shipped.
Today’s Earnings Report
The stock slipped 5.57% over speculative news on the earnings call scheduled for this morning. If investors don’t like the news at 8:30 and the stock continues to recede, I will consider this a major mid-long term buying opportunity. Look for options contract opportunities. Currently, the stock is trading below its 200 day moving average and above its 50 day moving average of $16.90 but I doubt NXPI will hold resistance at that level considering how quickly it rose through it.