Apple Is Still Extremely Innovative

Don't fall for the hype -- Apple is still an exceptionally innovative company.

Jan 13, 2014 at 10:45AM

The word "innovation" is probably one of the most abused terms in the market today. What investors -- particularly in consumer electronics -- have viewed as "innovation" have been broad form-factor shifts and fundamentally different usage models. Yes, the iPhone was exceptionally innovative. Not necessarily because Apple (NASDAQ:AAPL) invented all of the pieces that made up the iPhone, but because Apple put it all together just right.

Innovative business model -- it's all about the consumer
Apple's business model is simple, sporting an almost child-like wonder. Apple's goal, as is so often reiterated by Tim Cook when analysts press him about "new product categories" and "margins," is to develop the world's best products. Once Apple has that, it believes that the sales -- the payday for the shareholders, if you will -- flows naturally from adhering to this principle.

Think about the iPhone or the iPad. They're different-sized rounded rectangles, each with an applications processor, connectivity/RF, some DRAM/NAND, a display, and a touch-screen. Anybody can make something that broadly fits this description. But it's all of the little details, in both the hardware and the software, from the function to the form, that makes an iPhone an iPhone.

No need for a big marketing budget
Apple's sales, general and administrative expenses sit at about $11 billion over the trailing 12-month period --  just more than half of competitor Samsung's (NASDAQOTH:SSNLF) whopping $19 billion SG&A budget. For this $11 billion in SG&A and about $5 billion in research and development, Apple is able to rake in the dough to the tune of $170 billion. This is some pretty incredible leverage that most, if not all, technology companies would love to see.

The truly beautiful thing about Apple's business is that it is intensely focused. That $5 billion in Apple R&D gets users a new iPhone (or two), a new iPad, a couple of new Macs, and continual software updates. Of course, this is an oversimplification, since Apple's R&D is spent on things like designing world-class silicon, two well-regarded operating systems, as well as the software suite that is an integral part of the Apple ecosystem.

So, about that innovation
Investors expecting some grand revolution probably aren't going to get it from Apple anytime soon. The sheer technological disruption from the iPhone and the iPad are once-in-a-blue-moon events and cannot be reproduced overnight. While some are hoping that an "iWatch" or an "iTV" will drive that next new wave, the truth is that these expectations are probably too high.

Apple will continue to deliver both hardware and software innovation. Of this, there is very little doubt. Apple will introduce functionality and features that get customers to want to buy iPhones time and again, and it will continue to beef up its ecosystem so that once Apple has a customer, it keeps him or her for life.

That isn't as glamorous as a totally new "disruptive" product category, but providing consistent improvements that meaningfully enhance the user experience is "innovation" in itself. The only problem is that while Apple will lead the way, Samsung will always be close behind. This means that Apple is on an innovation treadmill, and it needs to stay a step ahead of its competition.

Foolish bottom line
A belief in Apple's innovation is a belief that Apple will continue to advance today's product categories to maintain leadership against its competitors. With the shares, though, come a sort of "call option" on the "next big thing." If there is such a disruption on the way, Apple is a top candidate to grab it by the horns, refine it, and really run with it in a way that Samsung never really could, no matter how many ads it runs about the "next big thing" already being here.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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