David Gardner has touted and teased many stocks for both his Rule Breakers and his Stock Advisor services — probably, in fact, we’ve covered more Motley Fool teaser ads here at Stock Gumshoe than we have any other publisher (and according to the quick calculations of one of our readers, they’ve had more winners than other publishers over the last couple years), so we usually get a big ol’ busload of questions whenever one of their teaser ads launches.
And this one is no different — the pitch sounds familiar, so I think we’re seeing a re-tease of an idea that Gardner pitched a couple years ago, but they’ve updated it with some new catalysts and info so let’s check it out and see if they’re still recommending the same stock as their “Intel of NFC”.
NFC, if you’ve not been paying close attention to smart phone chatter over the last few years, stands for Near Field Communication — it’s one technology that’s being pushed for mobile payments, basically a way of transmitting data over very short distances without touching, as with the smart card you might wave to get out of your office parking garage … or the chip in your cell phone that lets you wave your cell phone at the credit card reader to pay at the grocery store. NFC chips in credit cards are also the reason that you can buy aluminum frequency-blocking wallets at SkyMall, and the reason why some security companies who have solutions for wireless payments are such good candidates for stock teases and promotions (like IWSY, teased by Louis Basenese back in June and now back down after the exaggerated promise failed to be immediately fulfilled).
NFC is not, of course, the only mobile payment system — but it is a widely-anticipated possible winner in the “how will we pay for stuff in the future” sweepstakes. So what’s our pitch from the Fool today?
Well, the promises is (of course) a bit ridiculous as they try to whet your appetite:
“Just imagine being able to buy shares of Nokia when a mere 1% of the population was using cell phones… or Apple when only 1% of people had even heard of an “iPod”… or Intel when just under 1 in one 100 people were using a PC. Talk about getting in on the ground floor!”
And their answer to the “is this really going to take off” question is a catalyst in the form of a recent patent filing, so it looks still to me like the stock pitch is about the same as it was in 2011 … but this patent stuff is new:
“Take a peek at US Patent #20130211971
“For years, NFC naysayers have been chirping that ‘if Apple doesn’t use it, it must not be important.’ That all changed on August 15. Now that Apple has started filing patents based exclusively on this revolutionary technology, even the most boneheaded pundits can’t deny it: NFC is the wave of the future….
“Since the first NFC-enabled phone was released in 2007, it’s been clear to the majority of the tech world that Near Field Communication is a cornerstone of a mobile payment future.
“And considering that consumers around the world put $21.6 trillion on plastic each and every year, I’m sure you can understand why this technology has forward-thinking capitalists all hot and bothered.
“So why hasn’t everyone and their grandmother piled in too?
“Simple: because up until just this past August, Apple ignored NFC altogether—leaving airheaded industry commentators to speculate that Apple was coming up with ‘something better.'”
Then they get into some more big-name NFC-users to bolster the argument that the technology is just on the edge of taking off:
“And given that Google is making a major push into NFC, it probably comes as no surprise that Microsoft is planning to include it in the newest version of its operating system for smartphones — or that it now holds at least 14 patents referencing the technology.
“It’s also probably no surprise that rather than risk being left behind forever, Visa, MasterCard, and American Express have started partnering with the likes of Samsung, AT&T, and Verizon to offer their own NFC-enabled devices.
“Given the fact that its peers have already sold over 150 million NFC devices, it’s no wonder Apple is scrambling to catch up!
“Of course, once you have a look at the numbers, it becomes pretty obvious why these tech heavyweights are all betting so much on the future of NFC…
“According to The Wall Street Journal, $32 billion worth of purchases were made using mobile devices in 2010 alone. And if that doesn’t surprise you, this certainly will…
“An eye-opening new report from industry experts at I.E. Market Research says that number could easily jump to $950 billion by 2015 — meaning we could see the value of this industry grow by nearly 30-fold over the course of a single five-year period!”
David Gardner apparently believes that “this company is uncannily similar to an early Intel,” and they throw in a few charts to show you just how rich you would have been if you had bought Intel shortly after it released the dominant 386 processor, possibly turning your $5,000 in 1985 into well over $600,000 at the peak of the dot-com market around 2000.
So … is this company like Intel was before the boom in PC shipments began to build in the mid-1980s? Here’s a bit more from the ad:
“… when it comes to manufacturing the crucial, behind-the-scenes components that allow NFC to function in the first place, this company stands head and shoulders above all the rest.
“In fact, not only is it the clear leader in this explosive new industry (Samsung, Sony, Panasonic, Ericsson, Nintendo, HP, Cisco, and even Apple are already all top clients, and analysts have conservatively estimated it could control as much as 70% of the market)…
“But it actually helped to invent this world-changing technology — making it far and away the most trusted and highly regarded company in its field (which is why its CEO was recently able to describe his company’s dominant position as ‘Intel-like’….)”
So yes, this is still the same company David Gardner started teasing back in 2011 … who is it?
This is NXP Semiconductor (NXPI), a large Dutch analog chip company. David Gardner started pitching it in teaser ads in May 2011, just as it was in the middle of falling from about $33 to $15 over a several-month period, so it didn’t look good for a while and the anticipated earnings didn’t show up that year … but they did gradually start to appear, they paid down quite a bit of debt (the company was one of those leveraged buyouts by a private equity consortium, which loaded them up with debt and reorganized then took them public again about four years ago), and the stock has recently been bouncing around in the high-$30s.
We do also get a few more specifics, in case you’re curious:
“In fact, this company actually operated as a division within one of the most best-known electronic companies in the world for over 50 years before being taken over by one of the world’s top private equity firms and then spun out as a stand-alone company…
“Today it holds nearly 14,000 patents, employs some 28,000 people, and has operations in more than 25 countries — yet because it’s not headquartered in the United States it’s still virtually unheard of.
“And thanks to Apple’s ‘holier-than-thou’ refusal to incorporate NFC into its products – which we’ve already seen should be coming to a tidy end — this stock has been beaten down right along with plenty of other top-notch growth stocks out there…
“Meaning you’ve got a rare opportunity to snap up Hope Diamond potential at cubic zirconium prices.”
Is that true? Well, the stock is — just like it was in 2011 when we uncovered the teaser the first time around — quite inexpensive based on forward-looking earnings estimates, and quite expensive based on the past year’s actual earnings (it’s trading for about 99X the trailing year’s earnings, and about 9X expected 2014 earnings). That time around the forward earnings estimated didn’t come through — but if they do so this time, then certainly paying 10X earnings for a company with that kind of earnings growth would be reasonable.
Oh, and they’re releasing their quarterly earnings in about two weeks. It might be that no one will notice, particularly if the US Capitol has fallen into a sinkhole thanks to the efforts of too many politicians trying to dig themselves out of trouble at once, but they are expected to post better than 80 cents per share in earnings, a jump of more than 50% from the year-ago period, so expectations are high. NXPI has beaten analyst expectations for several quarters in a row now, and the relatively minor “beat” last quarter helped the stock to jump 10%+ in the days immediately after the report, so even though this is a big $10 billion company there can certainly be a lot of volatility.
NXPI is far from being a “pure play” on NFC chips — they are certainly the largest player in that market, and they are pushing to maintain “Intel-like” market share in the 70% neighborhood, but they have substantial competitors in this space and they are very active in other businesses. They just lost the Samsung smart phone NFC chip business to Broadcom this year, for example, but they were also one of the largest suppliers of chips for the automotive market again in 2012, a sector that has nothing really to do with NFC, and they are apparently making the motion-sensing chip (the M7) in the new iPhone as well (again, not an NFC chip — the iPhones still don’t have NFC chips).
And actually, I think that’s probably a pretty good thing — NFC has been proposed as a mobile touchless payments solution for a decade now, and has been introduced in some areas, but I don’t think we’re anywhere near a groundswell of consumer demand or a guarantee that payments through NFC chipsets will become a huge part of the market. Phones are so incredibly capable right now that it’s very hard to guess what the winning solution will be. Starbucks, for example, is probably the leading retailer in accepting mobile payments, with 10% of their purchases going through via mobile phones now, but those aren’t NFC chip purchases — they use barcodes displayed on the phone screen, like in Apple’s passbook, to let people make purchases using their prepaid Starbucks Card accounts. That was likely an easier and faster rollout than an NFC solution would have been, since there just aren’t nearly as many NFC-enabled phones as there are smart phones with screens that can display a barcode … and since every Starbucks cash register already has a barcode scanner.
That’s not to say NFC won’t become ubiquitous — it is getting installed into more and more phones — just that it’s not necessarily going to become the life-changing technology for retail purchases next year, and if it does get that far it won’t necessarily be true that NXPI’s NFC chips will bring them massive revenue increases for a decade or a monopoly position in a much larger market like Intel enjoyed with the “Wintel” monopoly in PCs. There is more competition in this space, and many, many more companies (including Intel) that could be competitive in designing and manufacturing NFC chips or otherwise play a major role in mobile payments. And really, frankly, as a practical matter it’s hard to imagine a world where the lion’s share of mobile payments don’t pass through the networks of Visa (V) and Mastercard (MA), the two companies who have owned the transition to a cashless society will probably continue to do so in the touchless and mobile society, even if it seems like I’m always too grouchy about having missed those stocks at bargain prices to buy them.
But the broader trends of more chips in more places, doing more sensor-like things, plays into the strengths of NXP Semiconductor too, as it does other big companies in the space like STMicroelectronics (STM) and Broadcom (BRCM) as well as smaller companies like Invensense (INVN), and NXPI does seem to have been getting a decent number of “design wins” lately to get their chips built into more and more products, and the leading position in NFC chips is probably theirs to lose.
And really, the market knows this — at 10X next year’s earnings you’re probably not thinking that you’re buying the Intel of 1986, that’s more like the valuation you’d assign to the Intel of, well, 2013. There’s more uncertainty with NXPI than for a behemoth like Intel, but there’s also dramatically higher growth potential in the next few years if the analysts are guessing correctly. David Gardner isn’t the only one predicting a bright future for NFC, of course — even in just the little world of hype-y investment newsletters we saw Andy Obermueller pitch NFC (and maybe NXPI) as one of the hottest investment opportunities of 2014.
So what do you think? Interested in buying NXPI for their relatively diverse semiconductor offerings, and do you think they’ve got a chance to be the “Intel of NFC?” Let us know with a comment below.
P.S. Yes, Apple did file a patent for “gifting digital media files” partly via NFC over the Summer. You can see it here if you’re curious — looks to me like it’s just another potential expansion of iTunes, potentially letting you buy a copy of a song for the friend who’s sitting next to you. Apple has filed for or been assigned at least dozens of other patents that reference the use of NFC technology over the last five or ten years, so I don’t know why this one would be a particular omen of impending Apple love for NFC. They haven’t been ignoring the technology, they just haven’t built the chips into their products (yet, at least — every round of new iPhones includes a rumor that NFC will be built in, so … prepare for rumors about iPhone 6 with NFC next year!)
I own shares of Intel, but not of any other stocks mentioned above. I wont’t trade in any stocks covered for at least three days.
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