Submitted by
Investing
Daily
as part of our
contributors program
.
As I mentioned in yesterday's column, we're gearing up to launch
our new "Free for Life"
e-letter:
Tech & Innovation Daily
.
The purpose of our latest "truth" initiative will be to unlock
the world's best investable technology trends… long before other
investors even have a clue.
It's what we like to call, "life inside the innovation
pipeline."
Ahead of our official launch date, however, I wanted to give you
a small taste of what you can expect from our the new
site
.
Today, I'm taking aim at one company that many consider to be
the indisputable vanguard of innovation:
Apple
(
AAPL
).
Time to Knock This Tech Giant Down a Few Notches
Apple is the most innovative company in the world, right?
I mean, what other company can claim ubiquity - and iconic
status - for nearly all of its products?
Apple's popularity is certainly attractive to most investors,
since fame generally leads to massive sales and profits, which, in
turn, help propel share prices higher. But popularity is hardly an
objective measuring stick.
So today, we're taking a closer look at more quantifiable
aspects of innovation to see if Apple does, indeed, deserve to be
crowned "The World's Most Innovative Company."
Not only will the results surprise you, they also point to some
killer investment opportunities.
The Proof is in the Patents
In today's highly competitive global market, any talk about
innovation must include patents. They represent the means by which
companies protect key technologies and their competitive advantage.
For some industries, like pharmaceuticals, patents literally
represent an insurance policy on profits.
(You can be sure that patents will come under scrutiny regularly
in
Tech & Innovation Daily
.)
Accordingly, we need to put patents front and center when
analyzing a company's innovative might.
And when it comes to patents, Apple is an innovating behemoth.
It boasts an estimated 6,805 patents and another 4,051
applications.
Impressive, considering that the roughly 3,500 publicly traded
companies that claim any intellectual property (
IP
) hold about 20 patents on average.
Apple's not alone, though.
Truth is, there are actually 21 public companies with even more
patents than Apple. Like
Google
(
GOOG
),
International Business Machines
(
IBM
),
Microsoft
(
MSFT
) and
General Motors
(GM).
Of course, when it comes to patents,
quantity
certainly isn't everything. After all, not all patents are created
equal. Some are old. Some are defensive in nature, meaning they
were filed in an effort to prevent competitors from being able to
develop the same technology. And some are just plain obsolete.
Not to mention, while some patents can produce upwards of $1
billion in licensing fees, others might never generate a single
penny.
So to more accurately determine how innovative a company is, we
need to verify the
quality
of a company's patents. That's where MDB Capital Group, Wall
Street's only IP investment bank, comes in…
The firm has built a one-of-a-kind patent database and screening
platform, called PatentVest (PV). In the process, MDB also
developed several proprietary IP-related metrics that leverage
patent information that's updated weekly from the United States
Patent and Trademark Office.
Today, we're going to focus on three of MDB's metrics:
~Key Patent Metric #1: PV Tech Score
If a patent is extremely valuable or foundational, other patent
applications are going to cite it over time. Just like how academic
papers use key research from outside sources.
Therefore, by measuring the number of external citations each
patent racks up, we can gauge the quality of a company's IP
portfolio. Simply put, the more, the better.
Of course, MDB's platform also takes the patent's age, marginal
value of each citation and total size of the company's portfolio
into account to provide a more accurate measure of quality.
The median PV Tech Score is about 0.90. Any number over the
median is better, as it signifies technology leadership (i.e. -
more significant innovation).
Apple's PV Tech Score of 1.04 hardly tops the charts. In fact,
773 other companies sport higher scores. (Expect more details after
Tech & Innovation Daily
officially launches.)
~Key Patent Metric #2: PV Tech Isolation Score
A lack of significant external citations isn't always a bad
sign. Here's why…
Booking the best profits requires that we find companies on the
cutting edge - innovating in areas of the market others haven't
even dreamed of yet, right?
Well, if a company is truly doing that, then not many companies
are going to be citing the work (yet).
Enter the PV Tech Isolation Score.
It measures the novelty of a company's innovations by looking at
the percentage of self-citations versus external citations. Again,
the higher the score, the better.
The median is 7%, with true innovators sporting scores of 20%
(or more). And any score above 50% suggests the company is working
on a potentially disruptive innovation.
Of course, if a technology is
truly
innovative, other companies will eventually move into the space and
the external citations are bound to follow. As that happens, the
percentage between self-citations and external citations will come
down, thereby lowering the PV Tech Isolation Score.
But if other companies don't start working in the space, it
could indicate that the technology is novel, yet not necessarily
commercially relevant.
Further analysis of the individual patents would be necessary to
determine if the innovations are both novel
and
relevant. But we'll save that discussion for another day.
As far as the PV Tech Isolation Score goes, Apple definitely
impresses. It checks in at 19%, well above the median score of 7%.
Once again, though, Apple doesn't top the charts. A total of 657
companies currently sport higher scores.
~Key Patent Metric #3: PV Three-Year Application CAGR (PV
CAGR) Score
Before we dub any company "The Most Innovative," we can't rely
on previous work alone. We need to make sure it's
still
innovating. That's where the PV CAGR Score comes in.
It measures the velocity of innovation by calculating a
company's three-year compound annual growth rate of patent
applications.
Based on this metric, Apple once again compares favorably to the
average, with a PV CAGR of 19% versus the average of 12%. However,
there are 109 companies innovating more rapidly than Apple.
The Final Tally
No single patent metric should be considered in isolation. Just
like no single fundamental metric can determine whether or not to
invest in a stock. Instead, it's much more useful to evaluate a
company's IP based on multiple factors.
With that in mind, I ran a screen for companies with equal or
higher scores than Apple for
all
three metrics. The results? There are actually three companies that
are more innovative than Apple.
Investors should take note of
AutoNavi Holdings
(AMAP). It's a leading provider of digital map content and
navigation, and location-based solutions in China. And it just
surpassed 100 million users.
To put that number in perspective, consider: Only five other
Chinese companies have more than 100 million mobile app users,
according to independent research firm, Analysys International.
They are
Tencent
,
Alibaba Group
,
Qihoo 360
(
QIHU
),
SINA Corporation
(SINA) and
UCWeb
.
What's more, Apple only has 11 stores across China. And its
iPhone sales are still trailing behind
Samsung's
Android-powered devices. So if you're looking for an
under-the-radar way to invest in the mobile device explosion in
China - with over 700 million subscribers and counting - forget
Apple, and consider AutoNavi.
Bottom line: Perception hardly matches reality. And in this
case, despite the perception, Apple is clearly
not
the most innovative company in the world.
To find out which companies are the most innovative in the
world, be sure to tune in to
Tech & Innovation Daily
.
We'll be serving up the market's hottest technology trends,
profit-side up, straight to your inbox.
Just make sure you're signed up to receive
Wall Street Daily.
When we broadcast our very first issue of
Tech & Innovation Daily
,
Wall Street Daily
subscribers will get a link to my special report,
The Seven Most Investable Technology Trends of 2013
.
The report and the subscription are "Forever Free" for
Wall Street Daily
subscribers. We'll never charge you a penny. Ever.
The very first broadcast, with a link to the full report, hits
inboxes next Wednesday, January 23.
