How to Profit When Apple Creates a New Currency Called iCash and Becomes
the Largest Bank in America
"I'm not sure any of us will carry (physical) wallets ten years from now"
-- 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 technology.
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 mobile payments.
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 Street Journal.
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 ago.
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), and 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 company.
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 my predictions.
Chief Investment Strategist, Game-Changing Stocks
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