How to Evaluate the Risks When Companies Copy Apple's Technology

NEW YORK (TheStreet) -- Apple (AAPL) introduces the iPad. Suddenly the world is full of tablets. Apple gets interested in TV. Suddenly there's Chromecast, Fire TV and Android TV. Apple looks to be getting into smartwatches and health monitoring. Microsoft (MSFT) is suddenly interested. How does one evaluate the prospects of all the imitators?

When thinking about the prospects of any given company, one has to be aware of why a given product becomes so popular. How a company designs and shepherds a product to market is important, and a rash desire to cash in on a competitor's product popularity, without sufficient technical maturity, can be fatal.

Another consideration for any company facing popular new products from a competitor like Apple is the fear of being left behind. For example, Microsoft spotted Apple a 30 month head start with the iPad and paid a heavy price in unsold Surface write-offs and a post-PC era stagnation of its stock. In fact, Microsoft may never be able to catch up. Samsung (SSNLF), in contrast, got on the tablet bandwagon almost immediately and has been rewarded with much better market share.

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So timing as well technical preparedness is crucial and dictates whether copycat products have potential.

Understanding Core Competencies

Apple's original iPhone may look like an example of a company that jumped out of its previous zone of expertise: the Macintosh. When Steve Jobs returned, to save the company in 1997, he had to jettison everything but a quadrant of four professional and consumer Macs. How does a smartphone fit into that simple Mac portfolio?

The answer is that Apple had developed quite a bit of expertise putting a beautiful, intuitive interface on top of Unix. Frustrated with semi-smartphones of the early 2000s, Apple executives realized that the hardware to run their terrific OS could suddenly be squeezed into a pocket smartphone. They could change the world.

And so Apple's decision to get into smartphones was not about a core Macintosh line or BlackBerry (BBRY) envy as it was about leveraging core software development and engineering expertise. Apple didn't copy BlackBerry, rather, it set a new standard based on internal software expertise, expertise that BlackBerry had failed to invest in. The decline of BlackBerry is a direct result of that failure to invest in the latest technologies.

We have seen what happens when a company rushes an underdeveloped product to market. There are half-hearted attempts to fix the worst of the problems, but eventually, it cannot compete well and the developer abandons the product -- to the dismay of perhaps millions of customers and investors who paid the price for their faith and investment in time and money. A philosophy of only making the very best avoids that pitfall.

Saying "No" and Customer "Yes"

All this is why Apple says "no" to so many projects that other companies might get excited about. Customers generally expect Apple to believe in itself enough that they can risk investment in the products Apple says "yes" to, and that leads, in turn, to good prospects for investors.

For example, Tim Cook recently revealed that Apple earned a billion dollars with the Apple TV hardware and content in 2013. That's a statement about Apple's design excellence, engineering, marketing and integration with the Apple ecosystem. It shouldn't be construed that, if a competitor jumps in, like Amazon's (AMZN) Amazon Fire TV, it'll also earn a billion dollars per year.

Modern tech giants are growing quickly in their wealth and technical resources. But not every project that looks like a good idea, hastily developed, results in a product that's welcomed for the long term with open hearts by customers. Understanding those core competencies and passions by tech giants is a guide to how successful they'll be in markets where they compete against and sometimes blatantly copy each other.

At the time of publication the author is long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AAPL's revenue growth has slightly outpaced the industry average of 2.2%. Since the same quarter one year prior, revenues slightly increased by 4.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although AAPL's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 43.45% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.39% is above that of the industry average.
  • Net operating cash flow has slightly increased to $13,538.00 million or 8.26% when compared to the same quarter last year. In addition, APPLE INC has also modestly surpassed the industry average cash flow growth rate of 5.28%.

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