IBM, King of the Patents

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

IBM (NYSE: IBM) has gone and done it again! For twenty consecutive years now the company has managed to create more patents than anyone else in the United States. The company was granted a record 6,478 patents in 2012 across all of their fields of business, including data, cloud, mobile, software, and a lot of patents on Watson.

IBM was not the only company collecting patents last year. There were two other U.S. based companies in the top ten: Microsoft (NASDAQ: MSFT) and General Electric (NYSE: GE). Here’s the top ten list and their number of patents:

  1. IBM                             6,478
  2. Samsung                     5,081
  3. Canon                          3,174
  4. Sony                           3,032
  5. Panasonic                    2,769
  6. Microsoft                     2,613
  7. Toshiba                       2,447
  8. Hon Hai                       2,013
  9. General Electric            1,652
  10. LG Electronics             1,624

How Does IBM Stay on Top

IBM has been atop the list for twenty years, and that’s no small feat. The company, over the last two decades, has created some 67,000 patents and they have been using them to their advantage.

To keep their advantage, IBM hires 8,000 researchers across the United States and in 35 other countries around the world. Their research and development spending from 2000 through FY 2011 was a staggering $70 billion. Research and development costs continue to grow at IBM by an annual rate of around 3%-4% on average.

IBM is also an acquisition based company, and they end up picking up even more patents this way. In FY 2011 IBM managed to acquire some 140 companies in a variety of business areas. The bottom line is that this company is huge, and their patent portfolio is the best the world has.

Microsoft is Playing Too

Microsoft is also playing the patent game quite well. They were granted 2,613 patents in 2012. If you add those 2,613 to the 800 or so that they picked up from AOL at around $1.3 million apiece, Microsoft is doing quite well for themselves.

Like IBM, Microsoft is in the process of creating many software-based patents. The patents at Microsoft target advanced technologies that could become useful in the future. These patents help protect Microsoft’s products such as Xbox, Windows, and their server-based divisions.

Microsoft spent more in their last fiscal year on R&D than IBM did, an incredible $9.8 billion (FY 2012). FY 2011 spending was $9.0 billion, an increase over FY 2010’s $8.7 billion.

Microsoft Research, a division of Microsoft, is the one of world’s largest computer science research facilities and they continue to come up with innovative ideas.

Let’s Not Forget About GE

General Electric was the United States’ third biggest patent collector, with 1,652 patents collected in 2012. The company spent $4.6 billion on R&D in 2011, $3.9 billion in 2010, and $3.3 billion in 2009 in order to design and collect on these patents.

GE spends a majority of their R&D money, particularly that from the U.S. government, on their aviation division. All of the other divisions at the company also receive a fair share, with healthcare receiving a lot of the budget in FY 2011 too.

Are These Companies Investable?

I really like IBM, and on a scale from 1-to-100 I’d have them in the 80’s/90’s. Microsoft isn’t for me though. I held that company for about 2 years and it didn’t really do much for me. GE is a good stock to own for diversity, as they have a wide array of products and they are constantly innovating.

<table> <tbody> <tr> <td> </td> <td><strong>IBM</strong></td> <td><strong>Microsoft</strong></td> <td><strong>General Electric</strong></td> </tr> <tr> <td><strong>Market Cap</strong></td> <td>$219.7B</td> <td>$225.8B</td> <td>$221.6B</td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td>13.93 </td> <td>14.3 </td> <td>15.8 </td> </tr> <tr> <td><strong>P/Book</strong></td> <td>10.12</td> <td>3.24 </td> <td>1.81 </td> </tr> <tr> <td><strong>ROI 5YR Avg</strong></td> <td>30.4%</td> <td>32.9% </td> <td>3.6% </td> </tr> <tr> <td><strong>Analyst Rating</strong></td> <td>2.29 </td> <td>1.9 </td> <td>1.82 </td> </tr> <tr> <td>Caps Rating</td> <td>****</td> <td>***</td> <td>****</td> </tr> </tbody> </table>

As you can see from the table above, all three companies are about the same size and all trade at relatively close multiples. There is a very low ROI at GE over the past five years. It's too low for me, and I'd throw it out of my picks. 

In terms of Microsoft, their numbers look great on paper, but I find it hard to see their consistent advantage in enterprise continuing on. If I were to buy the company it'd be speculative in nature on the hopes of something good, and probably because of their decent dividend yield. 

IBM is my favorite of the pack. They've been around a long time, they're not going anywhere, they continue to innovate more than any company I know, and they're the leader of a variety of packs. 

If you're going to look further into one of these three patent titans, go with IBM. 

Ash1402 has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company, International Business Machines., and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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