How to Invest in the Next Game-Changer in Smartphones

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Andy Obermueller

Intelligence always moves to the edge of the network.

That wasn't always true of the communications business. The only thing "smart" at either end of this network might be one of the callers, and that certainly varied. Phones used to be nothing more than a speaker, a microphone and set of buttons that sent audible tones the system could recognize as numbers.
Mobile payment means every merchant's checkout device you see needs to be replaced, and Verifone, as the the leading provider of hardware for electronic payment processing, stands to benefit.

That has changed.

The infrastructure of the nation's communications system is still home to some impressive technology, but the real genius is at the edge of the network -- that is, the tablet devices and computers we use to process information and in the smartphones we use to communicate.

After all, the smartphones we all have in our purses or pockets contain more capability than the computers NASA had at its disposal when Neil Armstrong was walking on the moon.

The single most important change this network will undergo in the coming years is right at the edge: the integration of electronic commerce functionality into our smartphones.

I write extensively about this in my newsletter, Game-Changing Stocks. Simply put, I think it's the Next Big Thing.

So far, I've been telling my readers about the consumer side of the market. But what we really need to look at is the company merchants rely on for the state-of-the-art equipment that will allow for seamless smartphone transactions to take place.

That company is Verifone ( PAY).

It's the leading provider of hardware for electronic payment processing. And here's the thing: Nearly every one of the devices that you see on the merchant's counter will need to be replaced.

There are two reasons. The first: Customers will be paying with highly secure near-field communication chips instead of handing over their credit or debit cards. But the other trend that's going on at the same time is the mass unplugging of retail point-of-sale terminals.

Well, "unplugging" might be the wrong word. The enterprise system is still there, but increasingly running in the background. The sales clerk is just as likely to process the transaction with a portable device as to ask the customer to walk back to the cash register.

Bottom line: Smartphone commerce and device-toting sales clerks are going to mean a one-two punch for Verifone's business, which I think is going to explode in the coming years.

Major retailers such as Wal-Mart ( WMT) and Target ( TGT) are already getting interested.

It is my prediction that smartphone-based commerce will become the fastest-adopted technology in U.S. history.

Verifone started a trend of its own. The company, founded in 1981, came up with the first electronic credit-card processing system. In the old days, the retailer took an imprint of your card and sent the charge slips to the bank to be verified. As banks began to lower their credit standards for a credit card, retailers wanted to protect themselves from getting stiffed by customers who were over their limit, and Verifone's system was the first that allowed retailers to do that.

But with every related technology that has come to market since, Verifone has been there to take advantage of it, from new and innovative ways for customers to pay to new and innovative ways for retailers to connect. It is the market leader with an unassailable industry position.

The best reason to use a near-field communication chip in lieu of a physical credit card is that you don't have to hand your account information to an unknown sales clerk. The transaction is totally secure and invisible to the clerk. With a smartphone-based transaction, that won't be possible.

Security is clearly a major concern, and complying with the stringent security requirements set forth by Visa ( V), Mastercard ( MA), American Express ( AXP) and other financial institutions is a huge moat for the Verifone business. The whole system runs on a secure proprietary operating system. That is a wall around this business no other competitor can breach.

Sales at this company are a billion a year -- that's what the company pulls in keeping the existing retailer base supplied with hardware. When one considers the possibility that so many of those terminals need to be replaced with new technology, the numbers get impressive, and quickly.

The thing to do is to beat the rest of the pack to the trade. Smartphone-based commerce won't make headlines until it's implemented at Wal-Mart, and I think these shares are worth owning well in advance of that date.

While the company, with a market cap of $5.6 billion, is a little larger than my recommendation in Game-Changing Stocks, its growth profile is just too sweet to ignore.

Two other things to like about this stock:

One, most of its shares are held by institutions, some 91%. That means the shares that are traded each day are more likely than not to be the 9% held by individual investors. That's always nice -- a less visible supply of shares means that the effect of good news will be magnified.

The other aspect to like about this company is its increase in shareholder equity during the past three years, when the portion of the company owned by the shareholders has risen in value to $1.1 billion from $72 million. This is evidence of strong financial management and bodes well for the company's ability to translate market demand into an increased stock price. I don't know about you, but I like that.

Risks to consider: It is possible this trend takes longer to develop than I predict, but I just don't see the change not happening. That said, you should do additional research on this stock before committing to buying.

Action to take: Smartphone-based commerce is an unstoppable trend. I like shares of Verifone at any price under $55.

Also See:
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  • If you Own These Stocks, Then Get Out NOW
  • This Major Disconnect Could Mean Big Profits for Gold Investors ...
  • Andy Obermueller does not hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of V, MA, TGT, in one or more if its "real money" portfolios.

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