by Susan J. Aluise | November 5, 2012 9:25 am
We’ve heard it many times before: This is the next big thing in tech. And right now, “this” means “near field communication.” 
Yet despite the unsexy name, NFC is indeed likely to be the next game-changer in mobile communications and retail payments. NFC’s value proposition — exchanging data or making payments simply by bringing your smartphone near a similarly equipped device — could be priceless for the companies that manage to prevail in this new market. And the reward for investors could be handsome.
Users of NFC devices can share documents, photos, multimedia content and more by simply tapping the devices together, as this recent TV ad for the Samsung Galaxy S III shows.
But if you’re looking for the gold mine in NFC, go where the money is: payments. ABI Research forecasts that NFC mobile payments will rise from $4 billion in 2012 to $100 billion in 2016 and $191 billion in 2017. That’s why tech giants, wireless providers and payment companies are jockeying for position in this burgeoning market.
The list of companies vying for supremacy in NFC includes Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Visa (NYSE:V), MasterCard (NYSE:MA), Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile.
But so far, mobile payment initiatives like Google Wallet have been slow to gain traction. The iPhone 5 launched without NFC, and the mobile payments landscape is cluttered with competing technologies and systems, as InvestorPlace contributor Brad Moon recently explained.
So, how do you cash in on a hot application like NFC payments without getting burned by a 21st century VHS vs. Betamax standards battle? By investing in key enablers of NFC payments. Here are four four stocks that hit that mark:
VeriFone (NYSE:PAY) is a major supplier of retail point-of-sale (POS) terminals, which merchants will need to upgrade or replace in order to accept mobile wallet transactions. About 80% of all the POS terminals VeriFone currently ships are equipped with NFC, and the company has been able to slash the cost of upgrades by two-thirds this year.
While it’s always a challenge to get merchants to buy new terminals, at least some of that cost likely will be subsidized by new entrants like ISIS, a mobile wallet consortium of AT&T, Verizon and T-Mobile. It doesn’t hurt that retailers are facing a deadline to upgrade to more secure POS terminals by October 2015.
With a market cap of $3.4 billion, PAY shares rose by about 6% to $31.50 on Thursday and have rebounded about 15% since the 52-week low on Oct. 3. The stock looks undervalued, with a puny price-to-earnings growth (PEG) ratio of 0.43 and a forward P/E of just over 9. My price target on PAY is $44.
U.K.-based global wireless company Vodafone (NASDAQ:VOD) is a 45% owner of Verizon Wireless and is staking a very large claim in NFC payments. Because Europe is a little farther down the NFC path than the U.S. is, VOD has been able to develop relationships that will give it an edge.
Its Oct. 29 global NFC payments deal with data encryption provider Gemalto is a case in point. VOD gains access to Gemalto’s Trusted Service Management platform, which encrypts data as it moves between mobile operators and banks — a critically important piece of the NFC payments puzzle.
With a market cap of $136.3 billion, VOD is trading around $27.50, about 9% below its 52-week high on Aug. 8. Like most telecoms, it has a high PEG ratio of 1.65, indicating overvaluation, but its forward P/E of under 11 is in line with the industry. Dull darlings like these reward investors in other ways: VOD has a beta of only 0.72 and a monster current dividend yield of 7.2%. My price target on VOD is $34.
NXP (NASDAQ:NXPI) knows a lot about NFC — it was a co-inventor of the technology with Sony (NYSE:SNE). It doesn’t hurt that Microsoft tapped NXP’s NFC controller software for the Windows Phone 8 operating system. NXP also just launched the second generation of its NFC tags and is moving into the secure elements arena as well with “touch sensors” to protect PINs or other data from being read without the user’s consent.
With a market cap of nearly $6.5 billion, NXPI is trading around $26.25 — rising more than 8% last Thursday on news that China Mobile would roll out an NFC-based mobile payments system next February. NXPI is trading 7% below its 52-week high on Sept. 14. The stock has a PEG ratio of just 0.37 and a forward P/E of a little over 10. My price target is $33.
Infineon (PINK:IFNNY) provides more than half of the secure elements for NFC today. These are essentially hack-proof, encrypted chips that act like a smart card to make sure your phone doesn’t “pocket-purchase” a pizza as you walk past Domino’s. Earlier this week, the Germany-based OSPT Alliance selected Infineon’s security controller for public transit fare collection.
With a market cap of nearly $7.7 billion, IFNNY is trading around $7. The stock has a PEG ratio a hair over 1, indicating it’s valued about right, and a forward P/E of nearly 13, which is a little higher than I’d like. Still, I think Infineon is in a strong position because mobile wallets will live or die on security, and its secure elements are gaining traction. My price target on IFNNY is $11.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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