Does Innovation Really Pay?

By Mark Morelli - July 25, 2012 | Tickers: AAPL, DVN, F, GM, NOK | 0 Comments

• Email
• Print

I recently read three books, the biography of Steve Jobs by Walter Issacson, Insanely Simple: The Obsession That Drives Apple's Success by Ken Segall and inGenius by Tina Seelig, on the subjects of creativity, innovation and simplicity.

It got me thinking about how creative thinking and innovation correlates to business and the stock market. One of the questions I had was “does innovation really pay?” 

What I found was that innovation can pay, if implemented correctly.

I decided to look at the stock price of publicly traded companies and some intangible evidence to help answer my question. I could have used other measures such as EPS, gross margin, market share, sales, market cap, etc. However I wanted to use a simple metric in keeping with my overall investment principles and lifestyle. 

I looked at the mobile device industry and particularly at Apple (NASDAQ: AAPL) and Nokia (NYSE: NOK), two of the titans of the business over the last two decades. One of the companies, Apple, has been wildly successful and the other, Nokia, not so much lately.

Nokia had, several years prior to Apple having done so, researched the possibility of developing an “iPhone-like” mobile device, using apps and having a single button, and an “iPad-like” tablet device that can connect to the Internet. However, Nokia did not pull the trigger and bring these ideas to market. Read the story in the Wall Street Journal. This might be one of the biggest mistakes in recent corporate history. 

I reviewed the stock price of the two companies at several key points in time corresponding to important events in the industry including the release of the iPod, iPhone, iPad and the peak of the Internet bubble. The starting point of the analysis was June 30, 1997, about the time Steve Jobs returned to Apple, and the end point was June 30, 2012, about two years after the release of the iPad. Prior to 2001 Apple had been primarily a computer company, and was innovative in the 1970‘s and 1980‘s within the PC industry. The time period that I chose contained two significant bear markets, including the bursting of the Internet bubble in March 2000, and the downturn triggered by the financial crisis of 2008.

The table below compares the stock prices of Apple and Nokia. 

Note that after each release of an innovative product the price of Apple stock increased and in fact greatly accelerated after the release of the 3rd product, the iPad. The price of Nokia stock peaked and began to spiral downward, first during the rupture of the Internet bubble and again after the release by Apple of the iPhone. Apple stock has gained more than 16,300% and Nokia stock has lost 60% during the time period of interest. The S&P500 index has gained about 56%. 

Tangential benefits of Apple’s innovation include the creation of a completely new industry, the app business. Some estimates indicate nearly 300,000 jobs have been created so far in that field. In addition, Apples success also translated to its hardware suppliers. Therefore, another study that takes into account the companies that Apple has an impact on (and those that it doesn’t) may be worthwhile.

With the potential release of other revolutionary and evolutionary products over the near term is Apple stock poised to keep rising? Reports indicate the “iTV”, most likely a highly innovative product, will be marketed soon. Improvements in previously released, innovative products such as the iPhone and iPad (the so-called “mini” version may be released this year) may also help the stock price. I wouldn’t bet against Apple.

Anecdotal evidence from another industry indicates that innovation and creative thinking does pay off and from another, it hasn’t.

The drilling technique called hydraulic fracturing (“fracking”) didn’t exist until the 1940‘s. The modern, economically feasible method was introduced in 1997 by Mitchell Energy (now part of Devon Energy) in the Barnett shale in Texas. It has expanded and is in widespread and successful use today. Nearly a million wells have been drilled using the technique.

Companies directly employing the technique now and in ancillary businesses, such as energy transportation and storage, are successful and may be worth a look. For example, the stock price for Devon Energy (NYSE: DVN) has increased by about 210% since merging with Mitchell Energy in 2002, although it is down significantly from its high in 2008. 

Some benefits to society include lower natural gas prices, less reliance on foreign oil, potentially more exports (such as in liquified natural gas, LNG, to countries like Japan) and less pollution as cleaner natural gas replaces coal as the primary fuel for generating electricity. Fracking may spawn evolution in other products such as engines for commercial vehicles powered by compressed natural gas (CNG).

Another innovative product, the Chevy Volt, has not paid off so far. GM (NYSE: GM), introduced the Volt in December 2010. Its success has been underwhelming. Less than 17,000 have been sold in the U.S. so far. GM’s stock price has declined by about 40% since the Volt was introduced, in-line with the performance of Ford (NYSE: F) which saw its stock price drop by about 45%. The S&P500 has gained 9.4%.

There may be many reasons for the problems with the Volt. The technology may not be mature enough or the car is not economically feasible (the manufacturers suggested retail price is around $40,000). It may be that the culture at GM does not allow innovation to succeed. It may be because of business or structural problems at GM and within the auto industry in general. Perhaps in the future, this innovation will pay off.

Note that my study was very limited and not intended to be a scientific and statistically significant exercise. 

The study does indicate a mixed record on innovation and creativity.

Successful implementation of an innovation pays off. If a company has a great culture and is creative, developing products and services that people want and are beneficial to society, the result is a more valuable stock price and other benefits for society.

Failure to innovate, or less successful implementation, doesn’t pay. A lower stock price and the layoffs of many employees is the result.

I urge investors to consider innovation and creativity as potential criteria to purchase a stock in addition to the more traditional metrics. Of course the difficult part will be to pick the next Apple and Devon Energy and ignore the next Nokia and GM when doing that. Investors may need to take a longer-term view when considering innovation.

• Email
• Print
• Feedback