NXP Semiconductors NV

NASDAQ:NXPI  
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This Technology Marvel Will Power the Future



Fundamentals

Written by Ophir Gottlieb, 10-09-2015

This is an update to a prior article posted on September 26th, 2015.

NXP Semiconductor (NXPI) is set to be inside more than one billion smartphones, watches, and other devices this year including the iPhone, Apple Watch and Samsung phones. It holds the dominant market share in a technology called "near-field communication," or NFC for short.

NXPI owns nearly 60% of the market share in NFC and currently owns approximately 9,000 issued or pending patents to defend its dominant position (Source: "NXP Semiconductors Corporate Factsheet", NXP Semiconductors, May, 2015. Retrieved July 22, 2015). The Motley Fool has called the company's upside nearly 'unlimited' and the market it addresses as several trillion dollars.

What is NFC, Exactly?
NFC technology powers a mobile payment, an opening of a door, a room recognizing your entry and adjusting to you, simply by waving your smart phone or wearable device. The chips from NXP also provide the security of information being shared with these devices which in and of itself is a business line that entire companies focus on. The technology will also end up being the crown jewel of self-driving cars, and industry forecasted to be nearly $20 trillion (that's 40 times as large as the Internet).

The Future
The company is truly Apple's 'Secret Weapon,' inside the guts of the iPhone, Apple Pay, the Apple Watch and likely the Apple Car as well as Samsungs products. Other mobile payment apps and wearables will almost certainly rely on NFC technology (including Google) and that means NXP Semi. Apple's recent launch of Apple Pay in its new iPhones and smartwatch are the seal of approval that NFC technology needed to become as commonplace as wifi, Bluetooth and GPS (Source: Reuters).



NXPI CEO Rick Clemmer told Barron's that Qualcomm (QCOM) had announced that they would get out of the business of making their own chips for "near-field communications," and would instead partner with NXP. That's a huge win. Further, in the latest quarter, NXP's wafer fabs reported an astounding 98% utilization.

How Big is Mobile Payment?
The largest banks are not only aware, but in bold support of the shift to mobile payment. To the extent that a mobile platform like Apple's increases payment volumes, the banks are extatic. Almost every major bank in the world is now an explict partner to Apple Pay and most have happily agreed to cut transcation costs.

NXP also works with Andorid and "more than three quarters of Android users (78%) would use a service similar to Apple Pay if it became available to them, a survey conducted by Helixion has found" (Source: Helixion). The bottom line is, people will no longer have their wallet in one hand, and their phone in the other and that means an absolutely enormous industry is forming. It also means cash as payment method will all but disappear.

[Bank of America is] convinced of growth that measures fully 200 fold in just seven years. By the year 2022, the mobile payments growth will reach a combined total of around $3 trillion.
Source: Investor Place




How Big Is This 'NFC Thing?'
NFC chips are expected to be in 550 million smartphones this year, including Apple's iPhone, Apple Watch and the ever expanding number of Android gadgets according to Gartner analyst Mark Hung.

As well as phones, NFC technology is being built into point-of-sale devices (as we discussed with Apple Pay), video game consoles and medical tools. Shipments of NFC chips are expected to reach 1.64 billion units in 2018, according to market research firm IHS iSuppli (Source: Reuters).

Much More

The use of NFC for mobile payments also opens the door to selling more "secure element" chips used to safeguard vital credentials like account numbers.

"For there to be a full payment solution there needs to be not only an NFC radio but also a secure element chip, which obviously increases the dollar content opportunity for chipmakers like NXP, but also provides a more robust and secure solutions for the mobile payments industry".
Source: Investor Place




More, Much More
Beyond wearables, smartphones and mobile pay, NXPI also has its hands in driverless vehicles, a market segment now explitly pursued by Apple, Google and Tesla. Morgan Stanley recently reported that it expects self-driving cars to roll out to the mainstream by 2018. We note that the "self parking" Lexus was already released in 2006 and since then several other vehicles have the same or similar functionality. In total, The Motely Fool presents evidence that the self-driving car industry, as it matures, could hit $19 trillion. That would be about 40x the size of the Internet. It's likely that automotive will be the crown jewel of NXPI.

But it's the security realm that has NXPI CEO Rick Clemmer even more excited.

Merger, Security and the Internet of Things (IoT)
The company is at the heart of the Internet of Things (IoT) mega-trend. NXPI is set to merge with Freescale Semiconductor and the combined entity will be the world's fourth biggest independent chip company.

Rick Clemmer has long claimed "In an IoT world, security will play a key role" because all these connected things will be even more prone to hacking and theft and such, and they increasingly carry personal data. "You need the ruggedized security of a hardened secure element" Source: Barron's.

He went further to say explain the power of the Freescale merger:


"If you look at the total solution [for IoT], it's the sensing part, the sensors themselves, which we think has become basically a commodity business, and so we see no reason to participate there. But then you also have to have the computing, the connectivity features, and the security. Well, we had the security and the connectivity parts, but we didn't have all we needed on the microcontroller side, because we were in areas that were very narrow."
Source: Barron's


With Freescale, NXP will be the top vendor of general-purpose microcontrollers. Keep in mind, security goes well beyond mobile payments, and into the realm of say, Apple's iPhone (or Samsung's Galaxy S), which holds personal credentials, and also NXPI's work on e-passports. Year-over-year revenue growth for NXP was driven primarily by 39% higher sales of chips destined for secure connected devices (Source: The Motley Fool).