The Stock That Will Capitalize on Apple's Next Big Move
Companies / Apple Sep 04, 2014 - 03:35 PM GMTBy: Money_Morning
William Patalon writes: As the launch of the Apple Inc. (Nasdaq: AAPL) iPhone 6 careens our way, we're seeing more and more speculation that the iDevice king wants to add digital payments to its "ecosystem."
And that's going to further supercharge the business of NXP Semiconductors NV (Nasdaq: NXPI), the specialized chipmaker whose shares are up 195% since we recommended them back in May 2012.
Let us show you why...
The "Smart" Money... Really
Apple is working with the Eindhoven, Netherlands-based NXP to add "near-field communications" (NFC) technology to the new iPhone 6. Apple has scheduled one of its major marketing events for Tuesday, Sept. 9. Most folks are expecting the company to introduce the iPhone 6, the iWatch, and a digital-payments service.
According to reports in the Financial Times and Bloomberg News, Apple has included NXP's NFC chips in the new iPhone - and perhaps in the iWatch, as well.
NFC technology works just as the name indicates: It allows device owners to pay for purchases by wirelessly connecting to checkout terminals or ticketing systems.
Despite investor obsession with iPads, iPhones, and the iWatch, it's this push to add digital payments to the company's technology ecosystem that could fuel the next phase of Apple's growth. Indeed, that's why we've been telling you about the company's efforts to add other products, services, and technologies to its stable of offerings.
One technology that could also factor into this push into retailing and payments is the "iBeacon," which technologists say could revolutionize smartphone technology in a way that makes handsets the go-to devices for the Internet of Everything.
The iBeacon was originally described as being a threat to NFC technology. Instead, it looks like they will be complementary.
The iBeacon is a Bluetooth-based system that functions kind of like an indoors global-positioning system (GPS) that lets retail stores, museums, and sports teams employ such strategies as "proximity marketing" and "customized marketing."
With proximity marketing, the beacon's ability to sense where you are can allow a nearby restaurant or store to send you their latest specials. Customized marketing is similar, except that the offers or coupons you receive will suit your specific interests.
Once you're "hooked," so to speak, the digital wallet comes into play - allowing you to pay for your purchase by holding your phone near the transaction terminal's "receiver."
There's been a lot of testing of iBeacon technology over the past year. According to reports I've seen, it's been used at Major League Baseball stadiums, at a swath of retail outlets, and by Virgin Airlines.
The rollout of the digital payments system could kick iBeacon demand into hyperdrive.
Bloomberg writer Matt Townsend says Apple is working on the NXP-powered "wallet" function with MasterCard Inc. (NYSE: MA) and Visa Inc. (NYSE: V).
RBC Capital analyst Daniel Perlin - who covers "point-of-sale" firms like NCR Corp. (NYSE: NCR), as well as the credit card companies - told clients in a research note that Apple will benefit from the following three "key attributes" that are "crucial to drive adoption" of payments:
- An installed base of 500 million iPhones.
- At least 800 million iTunes subscribers.
- And the kind of market power and brand cachet that translates into "the ability to drive the necessary standards."
It's Hard... but Old Habits Die
One of Apple's biggest challenges will be the need to change consumer buying habits. If you're like me, you're pretty comfortable with the credit card. So Apple will have to find ways to induce folks to stop using their "plastic" - and use their smartphones, instead.
Apple will try to drive consumer "adoption" with such devices as a loyalty points system.
"We believe part of Apple's strategy to introduce a wallet could be to enable consumers to shop and pay anywhere Visa, MasterCard, and Amex is accepted, but create a loyalty program 'iPoints' (managed in iTunes) that can only be redeemed in the Apple ecosystem," RBC's Perlin wrote. "In this example, consumers could potentially double-dip, earning loyalty points from Apple and from the banks' legacy rewards programs represented by the card brands. We further believe this type of loyalty program could be used to help fund many of Apple's new streaming product offerings."
Christopher Brendler, a payments-sector analyst who works for Stifel Nicolaus, agrees that plastic credit cards remain a "tough competitor." But he thinks that Apple is the company that's finally "cracked the code" on point-of-sale smartphone technology.
"We see game-changing potential" in Apple's efforts, Brendler told clients in a research note.
Initially, Apple will further ease the transition by focusing on brick-and-mortar purchases.
"With NFC and iBeacon to follow, we expect Apple's payments product to be more focused on physical, brick-and-mortar retail than online where the checkout screen is already inundated with potential PayPal competitors (Google, Amazon, Visa, MasterCard)," Brendler wrote. "We think Apple correctly sees a much bigger opportunity offline where consumer adoption is still negligible as the current iterations from PayPal, Google, and ISIS don't really solve much of a consumer problem. Much to their chagrin, plastic cards are fast and convenient enough and also enjoy mass acceptance."
Two other factors could work in Apple's favor.
The first is the iPhone's Touch ID technology, which will provide a sense of security for users - important in the push to change consumer behavior.
And the second is pure convenience. The American retailing sector is currently adopting chip-and-PIN readers. And they can be awkward to use. (If you've been to a Wal-Mart lately, you probably know what I'm talking about. Instead of a simple "swipe," folks paying with plastic have to insert their credit card into a reader. And it's kind of a pain.)
Holding your smartphone near a payment terminal will seem much simpler by comparison. And having the imprimatur of the credit card companies will certainly help.
The Price of Success
If Apple succeeds, it will become a payments "middleman" charging a tiny fee for every sale it is part of. Money Morning Associate Editor David Zeiler, who once operated one of the top Apple blogs in the world, says this could generate an additional $500 million in fees for the company - just for starters.
That's an example of the kind of innovation Apple CEO Tim Cook is pushing for so that his company can continue to grow.
And that creates the opening that could really drive NXP's stock price higher.
According to in-house tech expert Michael Robinson, the Cupertino, Calif.-based company could sell roughly 70 million new iPhones in the first six months of their release.
"I believe that is easily doable," said Michael, editor of our Radical Technology Profits advisory service. "In the firm's two most recent fiscal quarters, Apple had combined iPhone sales of nearly 78 million units."
Some analysts believe NXP's share price - currently at $69 - could soar to $85 a share in just 12 months. And if this digital wallet initiative really takes hold, the Dutch chipmaker could be in for quite a ride over the long haul.
And Apple has a big incentive to keep expanding its ecosystem. Just look what it's doing elsewhere.
Cupertino Believers
The "believers" in this "New Apple" are growing in number, Dave Zeiler told me.
"The iTunes Store, and the whole software and services deal, has traditionally been a quiet outpost of the Apple empire - but that's about to change in a big way," he told me. "It's actually destined to become a major contributor to the bottom line. Macquarie Capital projects that profits from this segment will explode from $10.95 billion this year to $19.12 billion in 2018, when it will account for a third of Apple's total profits. Add in the half billion from the digital wallet, and you're talking about more than $8.2 billion in annual net income."
All of this will help Apple succeed in its next phase of growth.
Incidentally, we recommended Apple back in July 2013. And Capital Wave Forecast Editor Shah Gilani, who told you about the stock last summer, re-recommended it in late December, naming it one of his Top Two picks for this year. Apple is up 72% since last July and 29% so far this year.
NXP isn't the only stock we believe will benefit from this iPhone 6 rollout. In a recent report, we also said that chipmaker RF Micro Devices Inc. (Nasdaq: RFMD) - another previous Private Briefing recommendation - figures to benefit in a big way, too.
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