Almost a year ago I wrote an article called “For Investors the SmartPhone War is Over.” My premise was stocks of companies in the mobile ecosystem will outperform the device makers going forward. Â Sorta like the old saying “the best way to make money in a gold rush is to sell the picks and shovels.” In many cases the component makers win no matter what SmartPhone you walk out of the store with. Â My theory worked out pretty well in 2010.
As a benchmark, I used the QFON SmartPhone index. Â It is an index that includes companies that are primarily involved in building, design and distribution of handsets, hardware, software, and mobile networks associated with the development, sale and usage of smartphones. Â I categorized the stocks by industry and created a spreadsheet with their stock returns. Â The component companies (picks and shovels) were the clear cut winners. Â Arm Holdings +142%, Atmel +167%, OmniVision Technologies +103% and Skyworks Solutions +101% to name a few.
On the other hand, devices makers such as Research in Motion and Nokia had disappointing years down 13.9% and 19.7% respectively. Â Palm was subject to a take under by Hewlett Packard for $6 per share. Â Google experimented with being a device maker and didn’t fare well either down 4.2%. Â Apple was the obvious exception and I stated that in my article.
I have written about Qualcomm many times (The Trend Rida). Â It is almost a given that Qualcomm will be providing the primary communication chip in the Verizon iPhone. Â That will be confirmed on Monday night when the first Verizon iPhone’s are delivered and someone “tears it down.” Â However, I think the big win will be if iPad2 and iPhone 5 use a combo GSM & CDMA chip. Â Qualcomm may be the only company that can deliver that chip. Â The tell will be when the iPad2 is announced – will there be two 3G models (GSM & CDMA) or one. Â Needless to say, that will be huge win for Qualcomm.
The new buzz is Near Field Communications (NFC). Â NFC will enable users to make purchases by waving the phone near a payment terminal. Â It actual extends beyond payments. Â Think about all of those loyalty cards in your wallet. Your phone essentially becomes an “e-wallet.” Â It is rumored that Apple plans to embed NFC in iPad2 and iPhone5 (Bloomberg). Â The company providing that chip wallet will “runneth” over.
I have identified four companies in the NFC space. Â I am sure there are others. Â Rest assured, Apple will only be using a provider that can produce millions of chips. Â Start-ups need to apply. Â NXP Semiconductor is a name many may not have heard of, but it is a spin-off of Phillips. Â There are rumors that Apple has been testing NXP hardware for some time. Â Goldman Sachs ran NXP’s IPO last year and we know Goldman always has the inside scoop.
Broadcom bought NFC specialist Innovision Research last year.  The company just announced a new NFC chip that  sounds interesting.  It is an ultra-low power chip that doesn’t draw power from the device’s battery (Phone Scoop).  This is most likely too late for the iPad/iPhone, but should be kept on our radar.  Matter of fact, after Broadcom’s disappointing earnings last week – this could be a good time to buy.
Samsung also recently announced a new NFC chip (Phone Scoop). Â Apple and Samsung have a strong relationship. Â It is quite possible that Apple has been testing these parts long before the chips were announced. Â The fourth company I have identified is On Track Innovations. Â In my opinion, it is too small to be considered as a supplier to Apple. Â However, that won’t prevent it from running up on the buzz.
My money is on NXP being the  provider for Apple’s NFC technology, but I would not count Samsung out.
Disclosure: I am currently long Apple, NXP Semiconductor and Qualcomm. Â I will most likely be adding Broadcom soon.