NXP is ready to cash in its chips

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Michael Haden 09/15/2014

On September 9, the world eagerly looked on as Apple announced its plans for the latest iPhone. Along with a much anticipated larger phone and smartwatch, Apple introduced a   system that would turn their phones into credit cards.

Apple Pay is an ambitious plan that could revolutionize the way we do business. Using NFC (near field communication) chips that would allow mobile payments, Apple could eliminate the need to carry around an assortment of I.D. and credit cards in our wallets. A user could simply store credit card information on their phone and tap the phone to a reader at the checkout register.

Recent security breaches like those at Target and Home Depot have underscored the need for a drastic revamp of our retail payment system. NFC technology will enable encrypted mobile payments without the necessity of cumbersome and unsecure magnetic strip credit cards. The chip that makes this possible is made by NXP Semiconductors.

NXP is already well established as a leader in the race to provide a secure alternative to a vulnerable payment system. While the U.S. has lagged behind, most of the world has already adopted chip and PIN technology to secure payments. NXP has locked down most of this market, supplying 50% of the world's secure integrated circuits in 2013.  

Supplying chips for the iPhone is merely icing on the cake for a company with a stranglehold on the NFC market. NXP has a long-standing relationship with Apple and is already a supplier of the iPhone's motion processor. With Apple holding several NFC payment-related patents, the two company's interests appear to dovetail nicely.

With an existing relationship seemingly tailor-made for producing payment-ready phones, some have wondered why Apple has been slow to adopt NFC technology. Android and Windows phones are already equipped with NFC chips. Apple has traditionally chosen a minimalist approach, opting to only add features that would significantly add to the experience of using the device. When the iPhone 5 was released, the decision was made that NFC was not a valuable addition. This decision may have been influenced by the fact that the antenna required for NFC devices would not work with the iPhone's aluminum back

Not content to wait for Apple to come around to the new technology, NXP found other buyers for their chips. Apple's competitors were moving ahead with NFC plans of their own. NXP now makes all of the Android NFC chips as well as the NFC components for Windows phones.

Chart courtesy of stockcharts.com

With a stake in virtually all of the NFC chip market and Apple opening doors with a new emphasis on NFC-enabled payments, NPX appears to be poised to ride a wave of new demand.

To share in this opportunity, look at the October 60/65 bull-put credit spread for at least a $0.30 credit. You will need to use limit orders to place this trade. This trade has a target return of 6.4% over 38 days, which is an annualized return of 61.47%, (for comparison purposes only). NXPI stock has to fall 7.7% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options
Referenced Symbols: NXPI

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