The era of the plastic credit card is ending. It started with the shift to "chip cards" and digital payments with smartphones. The growth from here will be in non-card form factors - think watches, rings, bracelets, and fobs for starters. In hindsight, this looks "obvious" but at the beginning many were obsessed with the credit card format. It's even more odd if you consider that payment options like EZ Pass for tools have been in widespread use for over a decade.
The implications for NXT-ID are clear - Fit Pay can become a layer of infrastructure to any connected device to enable payments (and other interactions.) Fit Pay has announced partnerships with several companies - most notably (so far) is Garmin which has introduced "Garmin Pay[TM]" into their active-lifestyle-oriented smart watch line with the new vivoactive 3. It's expected the capability will be added to more Garmin devices as they refresh their whole product family.
One key aspect of the FitPay[TM] platform is that device manufacturers can easily integrate the technology into their own solutions. For example, new device startups like Tokenize and Bee have sprung up and used Fit Pay to give their innovative personal devices secure authentication and payment methods without having to try and build them from scratch. Tokenize (http://www.tokenize.com) has come up with a ring that is designed to give you not just payments but also access control for doors, the ability to start your car, and access to all your passwords without having to type anything. Bee is an Indigogo campaign now but their key fob is a good example of a small, simple device that doesn't require charging. What I like about the Bee concept is that when I take the dog out for a walk in the morning I can get a coffee without having to bring my phone or wallet. My keys are always in my pocket.
But it's the "ugly parts" of FitPay that make it so valuable for their customers. By ugly parts we mean back end integration with payment networks and major banks. In June 2017 Fit Pay was approved as a Visa Token Service Provider. This is a big deal. There are only six of these worldwide as of today and most of those are outside the US. Visa lists plenty of other solution providers but most of them are only doing point-of-sale (mPOS) systems. The full list is here: https://visaready.visa.com/partner/solutions. Visa has embraced IoT payments and sees it as the key to future growth.
Fit Pay announced a collaboration with Bank of America for BofA customers to use their credit and debit cards with IoT devices using the FitPay platform. Fit Pay also offers a prepaid Mastercard option for customers that want to load a Fit Pay enabled device with digital cash. Additional banking partners will be announced over the course of the next few months. Because of these back-end capabilities new device makers can leverage easy-to-integrate FitPay technology to provide all banking and payment services.
Other companies that have executed a strategy like this include Twilio which famously attracted capital from Fred Wilson at Union Square a one-line business description. In 2008 when the CEO of Twilio, Jeff Lawson, called on Fred he sat down and said, "we have taken the entire messy and complex world of telephony and reduced it to five API calls." Fred didn't believe it until a quick demo proved that it worked. Today Twilio is still doing that and expanding into more challenging areas like video. The current market value of TWLO is $2.5B.
Fit Pay has an attractive business model. Deals, especially larger ones, can be tailored to the customer but generally involve 1) an integration fee to add the device to platform, 2) a per-device fee and 3) a monthly fee for ongoing platform updates. Not every deal will have all three components but in aggregate that's how the business will be built. Per-device fees will typically be small component of the manufacturer's overall device cost (think 1% or less of MSRP) and often won't require activation. Numbers will be small initially but grow over time with more customers, additional products within each customer and units shipped.
For example, Garmin has 24 smart wrist devices. Today only one has Garmin Pay. Garmin won't add it to every model but it fits well with the models costing a few hundred dollars, which is about half of the lineup. By the end of 2018 there could be a dozen different models with Garmin Pay. If you visit a Best Buy you'll see that many brands have entered this space and the expensive models will need the capabilities that Fit Pay enables. If the Garmin device works well it will lead to more customers in this segment. The Garmin vivoactive 3 with Garmin Pay is in Best Buy stores but not on display everywhere. We're still waiting for the Slate model before we buy one for testing.
Fit Pay is tapping into a large market opportunity. Wearable and pocketable devices for authentication, control and payments will be in the hundreds of millions of units over the next few years. Ultimately in the billions as we have seen with smartphones. They aren't all going to be running Nxt-ID technology but they are certainly gaining market share right now.
LogicMark On Plan
It's not the most explosive business of the bunch but the trends driving the LogicMark business are firmly in place and generating consistent profitable growth. Their no-monthly-fee personal emergency response (PERS) systems continue to gain market share in existing channels and the company is adding more retail outlets to the mix.
There are trials going on in different retail stores. There are also changes in display, packaging and pricing which should continue to improve volumes. The trials and Logicmark's established sales channels create future opportunities for growth as the company and NXT-ID develop the next generation of products to serve to the market.
LogicMark was acquired in mid-2016 and has provided a profitable, consistently growing revenue stream for Nxt-ID which has helped to improve the balance sheet and put the company on a solid financial footing to support and grow all three businesses.
WorldVentures Proving Out the Beta
Nxt-ID delivered tens of thousands of units to WorldVentures in Q1 and Q2. These early flye cards are being put in the hands of early users for continued testing and feedback. The major launch date of the production flye card has yet to be determined so for a quarter or two we don't expect much WV revenue to flow to Nxt-ID as the existing inventory is worked through.
As an opportunity for 2018 and beyond the flye card is substantial but it has taken longer than expected. It's worth noting that all the other smart cards touted with slick videos years ago have all fizzled. The flye card is unique and is still expected to launch with significant volumes expected as WorldVentures members could absorb 500,000 to 1M units per year. Our forward estimates only capture 1/3 of this potential volume. Once we can observe the production flye card in action and get more guidance from WorldVentures on their plans we can revise those estimates.
Model Updates & Conclusion
We've made substantial revisions to the model. For the rest of 2017 we reduced our expectations for WorldVentures, increased those for LogicMark and added some Fit Pay revenue in Q4. The net impact on our estimates for FY2017 is $200K. We are still expecting revenues of $27M. Nxt-ID will be profitable at the operating level for the full year but we could see a small operating loss in Q3 and then a return to profitability in Q4.
In the longer-term we have increased our estimates for Fit Pay due to their recent execution and reduced our estimates for WorldVentures. Part of the WV reduction is the delay in launch and partly because we are lowering our unit revenue assumptions by 25%. As we noted earlier our long-term WV estimates are pegged at about 1/3 of the opportunity.
LogicMark numbers were tweaked slightly higher based on expectations for Q3 and Q4. We also lowered our PE assumption from 20x to 17.5x but will revisit this after WV goes into production.
With all the changes in our model suggests an intrinsic value of $14/share.
As an exercise, we also did a model that shows no business from WorldVentures, keeping everything else the same except for multiple which would be closer to 25x. That still generates an intrinsic value of $13/share.
Even if we are "half right" the current share price of $2.20 offers a multiple of appreciation for patient investors and an attractive risk/reward ratio.
Full report and charts:
SoundView serves as a strategic advisor to Nxt-ID and provides advisory and other services to the company including strategy advice, company positioning, investor communication methods and ongoing technology and market research. SoundView employees do not have positions or other vested interest in Nxt-ID stock at the time this report was published. (see back page for more general disclosures).
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