There are plenty of reasons to be bullish about Apple (AAPL -0.28%) stock, but bears all tend to focus on the same issue: innovation. A significant number of Apple-watchers believe that the company's success depended entirely on the genius of Steve Jobs.
According to this line of thinking, Apple has not produced any innovative products since Jobs died in 2011. The bears believe this means that Apple's innovation edge is dead (in spite of what many Apple insiders say) and predict dire consequences for Apple's earnings.
Many Apple bears argue that products like the iPhone 5s are not innovative. Photo: Apple
But these bears miss one key fact. Even if Apple can no longer innovate -- which is not a settled fact -- that doesn't mean that its earnings must go into a tailspin. In fact, Apple has posted its best earnings and sales results years after the supposed "end of innovation" in 2010! From an investor perspective, evolution may be nearly as good as innovation.
The death of innovation?
As recently as 2010, Apple was clearly the consumer tech world's innovation leader. That year, Apple redefined the tablet market with the iPad. Consumers had looked askance at earlier tablets that featured a clunky stylus-based input system, but they loved the iPad's intuitive touchscreen interface.
Apple also released the iPhone 4 in 2010. Apple made the iPhone 4 significantly thinner than previous smartphones by building it with a stainless steel frame that doubled as an antenna. The iPhone 4 also included Apple's first-ever Retina display. Even with these changes, some commentators described the iPhone 4 as "evolutionary, not revolutionary."
Apple was late to introduce a 4-inch screen and LTE support with the iPhone 5. Photo: Apple
By comparison, subsequent changes to Apple's product line in the last 4 years have been far less revolutionary. Looking specifically at the iPhone, the main new feature for the iPhone 4S was Siri. Several years later, Siri is still far from being a perfect speech recognition tool.
The two most important upgrades for the iPhone 5 were a larger screen and LTE support. Both features had been available on competitors' phones for more than a year. The iPhone 5s added a fingerprint sensor and a stripped down OS: useful developments, but hardly revolutionary. Thus, it's not too surprising to see Apple bears claim that innovation is dead at the company.
So what?
Even if bears are right that Apple is not as innovative as it was five or 10 years ago, they are wrong to presume that a collapse in profits must come in the near future. In fact, the last few years have been Apple's best from a profit perspective.
AAPL Operating Income (TTM), data by YCharts
As the above chart shows, Apple's operating income has been in the $50 billion-$55 billion range for the past 2 years. That's more than double what it was in 2010 -- Apple's last year of innovation according to most bears. Apple's earnings are expected to grow further in the next year or two.
Additionally, while revenue growth has slowed, it has remained in the high single-digit range. That's fairly impressive for a company with annual sales approaching $200 billion. Furthermore, iPhone related revenue rose 14% last quarter.
AAPL Revenue (TTM), data by YCharts
In short, the bears' argument that Apple has not produced any innovative products in four years merely suggests that Apple does not need to be innovative to produce massive earnings. It can continue to lean on the innovations of five to 10 years ago and grow revenue and earnings by making incremental improvements and expanding distribution.
Indeed, speaking as an iPhone user, I believe that Apple's efforts to make the iPhone thinner and its addition of LTE support have been critical to improving the user experience. These changes may not be especially innovative, but they have added a lot of value to the product -- perhaps more than the potential addition of more innovative features.
Foolish final thoughts
Members of the tech press expect Apple to release a smart watch this fall, and other new product categories could also be coming later this year or in 2015. It's too early to conclude that Apple can no longer innovate, especially considering that there was a gap of more than five years between the iPod and iPhone product launches. Innovation can take time.
But even if the iWatch doesn't turn out to be especially innovative, Apple is not doomed -- at least in the near term. Apple has reached record levels of revenue and earnings in the last two years, and iPhone sales have been marching steadily higher: all without anything that bears would call innovation.
Thus, many bears' arguments against Apple amount to little more than fear-mongering. Despite Apple stock's recent run, it is still valued at slightly less than the market's earnings multiple. Apple doesn't need massive earnings growth to justify its stock price. If bears want to win this argument, they need to produce some proof that Apple's earnings machine is failing.
