"I'm not sure
any of us will carry (physical) wallets ten years from
-- Michelle Peluso, Citigroup
When you were younger, would
you have ever believed that a handheld telephone would replace your
wallet? Well, that's becoming the new reality. According to
market-research firm Gartner, every year people use their cell
phones to buy $172 billion worth of items. And that number is
expected to increase an amazing 249% by 2016.
To capture those gains, several companies are positioning themselves
to compete in this very big mobile payment game. I predict Apple
will be the winner.
In fact, I predict that within the next 12 months, Apple will create
a new currency called iCash and become the largest bank in America.
The company is already quietly moving in this direction. It recently
acquired biometrics security firm AuthenTec (Nasdaq: AUTH).
Why? Because the single most important part of the mobile payments
revolution is security. It wanted to have sole access to the best
And remember, Apple has a history of transforming technology into
something you can use every day. Just look at the iPod. Or iTunes.
Or the iPad.
Having followed Apple for more than fifteen years, and having made
several accurate predictions about the company, I believe that it
has the best shot of creating the "It" product when it comes to
That's not to say that Apple doesn't face stiff competition.
For instance, Wal-Mart, Target, 7-Eleven, Publix Supermarkets and a
handful of other major retailers announced that they are working to
develop their own mobile payments system, according to The Wall
And other cell phone companies, like Google and Vodafone, are also
vying for dominance in this space.
Fortunately, there's a simple way for you to profit from this sea
change with or without Apple being the winner.
It came to me when
I asked for my check
after dinner one night. The waitress came by with her iPad and
up on her screen came a place for me to review and sign my bill. "Do
you want me to text you the credit card receipt?" she asked. What
the heck is going on? Is there anything my iPad and smartphone won't
do these days?
If history is any guide, these mobile-based business transactions
are just child's play compared to what we'll be doing in the years
ahead. Of course, none of this would be possible without the steady
and stunning advances in semiconductor devices as today's handheld
devices pack all kinds of chips that possess greater capabilities
than even Steve Jobs or Bill Gates imagined just five or 10 years
So even as we remain in awe of the stunning technology breakthroughs
that happen on a monthly or quarterly basis, we need to keep track
of which companies are best-positioned to profit from the trends.
And right now there's a company that has a unique role in this game: It makes
the various electronic components, including chips that make mobile
payments possible. It currently has relationships with all of the major smartphone manufacturers, including Apple.
It's a $6 billion company, which would be nothing for Apple or
Google to buy, considering their cash hoards. After the AuthenTec
acquisition, I hold that out as a distinct possibility.
In any case, if mobile payments keep growing at triple-digit rates,
this company would be providing hundreds of millions of chips and
could easily double its profits in a few short years. You can
imagine what that would do to its share price.
The company is NXP Semiconductors (Nasdaq: NXPI),
it clearly has the most
upside of any company competing in the mobile payment space.
NXP is a
global leader in the field of chips that help devices identify and
communicate with each other. It's a technology known as "near-field
communications," which enables any two devices that are near each
other to talk to each other.
And it's a booming business for NXP: It grew 19% in 2011, 41% in
2012, and is on track to grow 30% this year (to $1.26 billion),
according to analysts at Merrill Lynch. These ID chips were just 16%
of NXP's $4 billion revenue base in 2011, but should account for 35%
of sales by 2015.
The real question for investors: Can NXP make money with its
cutting-edge chips? After all, some chip makers offer boring me-too
products, and are content with gross profit margins of just 15% or
20%. "We'll make it up on volume" they say. NXP doesn't need to
offer up such excuses.
Thanks to a combined $5 billion in R&D spending over the past six
years, this company's products are so advanced that NXP can charge
top dollar for them. That strong pricing power fuels gross margins
in excess of 45%, and EBITDA margins of 30%.
Actually, the impressive margin profile isn't solely due to robust
R&D. It's also part of a long-term management plan to continually
sell off semiconductor product lines that are in very competitive
areas and therefore have weak pricing power and profit margins. NXP
takes the proceeds from those asset sales and re-invests the funds
into newer more promising segments.
Still, at the end of the day, a true test of any company is its
ability to convert solid profit margins into robust free cash flow.
And by this gauge, NXP is a star in the making. The company
generated $470 million in free cash flow, and analysts at Goldman
Sachs project this figure to steadily grow to $940 million by 2015.
That works out to be a free cash flow yield (Free cash flow divided
by market value) of around 13%, among the highest of any technology
It's quite rare to find a company with such a strong presence in the
most dynamic corners of the technology industry, a management team
that has a laser-like focus on margins, and a platform to generate
such outsized free cash flow. NXP checks all of these boxes.
That Apple will create a currency called iCash is just one of 11
predictions that I've made for the next 12 months.
Click here to watch my newest presentation, The 11 Most Shocking
Investment Predictions for 2015, to get the full story on all 11 of
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