FundamentalsWritten by Ophir Gottlieb, 11-03-2015
While the known mega cap names will participate and profit from the Internet of Things (IoT), it's our goal to identify the lesser known companies that will drive the revolution and benefit on a colossal scale by being the guts behind the technology that will be in every device for every producer. It turns out there is such a company and The Motley Fool has called the company's upside nearly 'unlimited.'
Better yet, while the stock is up 470%since its IPO, it's down nearly 30% from its highs off of a poorly received earnings report.
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What's Going to Happen
What if there was one company that helped invent and now dominates the chips that went into everything that will power the IoT and also was the new number one supplier for the automotive world's change to self-driving and connected cars? Well, there is such a company: NXP Semi-conductors (NXPI). Here's what's happening.
Near-field communication (NFC) is the technology that will power everything. 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).
Yes, that common. We're talking about billions of chips per year.
NFC is exactly what it sounds like: it allows the close-range exchange of data using a specialized form of wireless technology. NFC will power mobile payment (swipe your phone), an opening of a door, a room recognizing your entry and adjusting to you, simply by waving your smart phone or wearable device. 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).
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Who's Going to Win?
NXP Semiconductor (NXPI) helped invent NFC technology and holds several key patents (thousands, actually) that stop other chip makers from entering the NFC field (Source: Strategic Investor). The stock is up nearly 470% since its IPO in 2010, rising from $14 to now just under $80 and here's why.
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The company 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 position at nearly 60% of the market and currently owns approximately 9,000 issued or pending patents to defend its position (Source: NXP Semiconductors Corporate Factsheet).
Further, 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. You see, you don't have to choose which company's products will dominate, you just need to know that NXP will likely be driving most of them. That's the investing thesis.
Finally, NXPI's merger with Freescale Semiconductor makes it the number one auto chip supplier. We're talking about markets that are measured in multiples of the size of the entire Internet.
Even Qualcomm (QCOM) announced that they would get out of the business of making their own chips for "near-field communications," and would instead partner with NXP.
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Right Now: Opportunity?
NXP delivered sour earnings in October and the stock collapsed nearly 20% in a day. Revenue came in at $1.52 billion versus estimates of $1.55 billion. EPS came in at $1.57 beating the street's consensus of $1.50. The issue was guidance which was taken down for Q4. We do note that CEO Richard Clemmer warned of economic headwinds in the prior quarter, and those materialized but to an even greater extent than the lower end of forecasts.
Here's a quote from the CEO:
But let's not lose the forest for the trees. As this company gears up for the boom, it still has reported all-timehigh sin revenue and earnings on a trailing-twelve-month basis. Here's that chart with revenue (TTM) in the bars and net income (TTM) in the orange line.
Earnings are up up nearly 45% year-over-year. But...
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This is About the Future
We have to look forward for this company because the IoT has barely begun. 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.
Opportunity: 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 explicit partner to Apple Pay and most have happily agreed to cut transaction 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.
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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).
NFC and Security
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NFC and Driverless Cars
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 Motley 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.
In fact, the WSJ wrote that "NXP Semiconductor's deal for Freescale would vault the combination to top supplier for autos." This is a market that stood at nearly $30 billion in 2014.
Merger, Security and the Internet of Things (IoT)
But it's the security realm that has NXPI CEO Rick Clemmer even more excited.
NXPI is set to merge with Freescale Semiconductor and the combined entity will be the world's fourth biggest independent chip company and as stated above, the largest supplier to automobile manufacturers.
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:
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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).
The author is long NXPI stock in his personal account.
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