“Is innovation dead at Apple?” asks analyst Wamsi Mohan. “Patents suggest otherwise.”
From a note to clients that landed on my desktop Friday:
Patents show breadth of development: Investor conversations often focus on the apparent lack of ongoing innovation at Apple. When the iPhone (once in a generation product) becomes the basis of comparison, everything else, however successful, looks incremental. In our opinion, there is a large effort underway on new product development, clues to which are hidden in the patent applications. Our work suggests that the broad categories of patents are around Augmented Reality (AR)/Virtual Reality (VR), Wearables, Health/Fitness, Autonomous and a trove of miscellaneous patents that are applicable to all devices (battery, display etc.). Apple is innovating in all these areas without compromising on user privacy.
Defensive or Offensive investments? Apple’s R&D spend (ex-stock comp) has increased from $1bn in 2009 to $13bn in 2019. In many cases, these investments are targeting products that can be several years in the future. Our work looking at patents suggests that the step up in spending comes both as a defensive mechanism (not letting technology innovation disrupt Apple’s lead) and offensive mechanism (entering new product categories with differentiated products). Investors are concerned investments in OpEx far outpace rev growth but we expect that new products, over time, will create convergence between rev and expense growth.
Wearables, fitness, health likely most near term. The patents around wearables suggest that Apple could be targeting AirPods with biometric sensors, Apple Watch with UV monitoring, gesture recognition for AR/VR applications, Machine Learning projects to enable autonomous driving and integration of various existing devices with a car.
Maintains Buy rating and $230 price target.
Fun fact: In four years, Apple has grown its wearable business from $0 to $15 billion, the size of a Fortune 200 company.
My take: This note is like the best-of Patently Apple, filtered through Merrill Lynch.
Below: Three more drawings of Apple inventions that may or may not ever see the light of day. Click to enlarge.