Common sense suggests that compiling a powerful portfolio of potent patents should produce perpetual profits. But according to a recent study, that's not always the case.
Last year, IBM
According to the study, although IBM has been the patent king for many years, over the past five years, its collection's value is ranked only eighth in the world when it comes to "inventiveness." Microsoft ranks first.
Interestingly, the companies you might think of first as great innovators were ranked lower still, with 3M
Brother, can you spare a patent?
Patents are valuable for companies in many ways. Investments in research and development lead to new technologies that can then be used in new products, or licensed to other companies for a lucrative fee. The licensing of technology is a key revenue generator for Qualcomm
Innovation can be a powerful profit driver. Companies that break rules and devise new ways of doing things can create entire new industries. Apple has generated huge new business lines for itself (and other companies!) with its iPod, iPhone, and other products.
Quantity and quality
While it's instructive to note that the quality and profit-potential of patents is more important than their number, we shouldn't dismiss companies like IBM. A towering pile of patents opens up many possibilities for a company.
If you want to look for companies that can innovate and deliver big returns, keep an eye on their spending on research and development (R&D), along with your usual examined metrics. Just look for the R&D line item in the income statement, then divide it by total revenue, creating a ratio that you can compare against that of a company's rivals. Here's a quick look at several tech titans' recent research spending:
|
Company |
R&D Spending |
Total Revenue |
R&D as a Percentage of Revenue |
|---|---|---|---|
|
IBM |
$5.8 billion |
$95.8 billion |
6.1% |
|
Microsoft |
$8.6 billion |
$58.7 billion |
14.7% |
|
Apple |
$1.4 billion |
$46.7 billion |
3.0% |
|
Hewlett-Packard |
$2.8 billion |
$114.6 billion |
2.4% |
|
Qualcomm |
$2.4 billion |
$10.6 billion |
22.6% |
Source: Capital IQ, a division of Standard and Poor's. Figures are for trailing 12 months based on most recent financials.
Patents in perspective
Judging from the numbers above, the total amount you spend on R&D, and the percentage of revenue you spend on it, doesn't completely reflect your inventiveness. Look at Apple's seemingly low levels. Yet Qualcomm's high levels do indicate the importance to the company of R&D and its resulting patents.
As my colleague Anders Bylund found, "Companies with higher-than-average R&D spending also created above-average market returns for their investors." Perhaps that's why our team at the Motley Fool Rule Breakers newsletter has been known to look at "R&D efficiency" when they scour the market for potential blockbuster stocks.
If you want to examine a company's R&D spending more closely, look into how many new products or services it offers each year. A company may be spending generously on R&D, but if that's not translating into profitable results, it's a questionable expense.
What patent-rich companies are your favorite investments? Which do you think should spend more on R&D? Share your ideas in the comments box below.
