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Innovation Key for Investors to Bite Into Apple Again
CNBC.com | March 05, 2013 | 02:20 PM EST

A few years ago Apple's innovative iPhone remade the market for phones, mobile computing, email and even music. That's a tough act to follow.

The company has faced this dilemma before. In 1977, the Apple II personal computer broke new ground and hatched many imitators. But it would be decades before the company found another revolutionary product.

With the iPhone, Apple [ AAPL 98.38  -0.64 (-0.65%) ] transformed the mobile experience, but now the question lingers: Can the company produce the next game-changing technology?

"Apple as a company has a tremendous track record of coming out with the next best thing and that certainly has been shown with iPhone products. But where does that go and have they reached, not a dead end, but a peak?" said Jeff Orr, analyst at ABI Research. "There's always that question of can they reinvent themselves?"

Apple, which has amassed $137 billion in cash, hasn't introduced a product in a new category since Steve Jobs' death in 2011, and that has made it seem that the company has lost its edge. To boost its fallen stock price, Apple must reclaim its innovation legacy, experts say.

(Read More: The Last 6 Times Tim Cook Has Talked, Apple's Stock Has Dropped )

New Technologies

While it's widely speculated that Apple will unveil a smart watch and a TV this year, it's not clear these products are what consumers want.

"Apple didn't invent the mobile phone—they re-envisioned how the mobile experience should be done and how it should engage with people. And I think that's the same thing they are trying to do with the TV," Orr said. "The latest rumors are of a watch. I'm not certain that is the type of solution they are envisioning. There are many areas to innovate ... but a spywatch is probably not what most people are looking for."

Former Apple CEO John Sculley even acknowledged Apple's creative rut.

"We are at a period now where there is sort of a lull in innovation, so I wouldn't expect to see a creative leap from Apple for maybe a few years," he said in an interview on CNBC last week.

Sculley, though, said he believes Apple's slump is part of a broader tech cycle affecting the entire industry. (Read More: Apple Faces 'Lull' in Innovation: Former CEO )

Arun Sundararajan, a technology professor at New York University, said that a broken business model and growing competition will push Apple out of the running as a technology leader if it does not make some major changes.

"Eventually it will fail. It's not sustainable unless they are prepared for a shift. The only solution seems to be a very broad R&D investment," Sundararajan said. "This is the only way I see a tech leader staying a leader: They have to invest in a lot of technology."

(Read More: Two Things Apple Must Do to Catch Up With Samsung: Analyst )

CEO Tim Cook touched on Apple's innovation strategy at its annual shareholder meeting. "Obviously, we're looking at new categories— we don't talk about them, but we're looking at them," he told investors.

Sundararajan said Apple needs to do more than look at new categories if it's going to stay on top—it needs to spend money in niche technologies.

"A good use of the pile of cash they are sitting on is a massive investment in research and development and in fringe technologies that might be big in five years," he said. "They have the luxury of having the resources to do this, and if they do this, perhaps in the next few years, when we have knowledge of what the next big technology will be, they will have some experience with (it)."

But the company is already investing in technology that will pay off sooner than everyone thinks, said Trip Chowdhry, managing director at Global Equities Research.

(Read More: Mobile Giants Forced to Reckon With Emerging Markets )

Although Chowdhry's firm doubted Apple's future three months ago, recent changes have shifted its view of Apple's future from negative to positive.

Jobs emphasized the user experience but Cook put shareholders first and forgot the user, Chowdhry said.

"Over the last two or three weeks, we think Apple has gotten its direction right. Apple has not announced further dividends or stock buybacks, but what they have said is we are going to invest in supply chain and innovation," said Chowdhry, who predicts "an eye-popping" second-half of the year that will offer "several devices that you and me have not even imagined."

(Read More: Did Apple Just Force Top Execs to Hold Stock? )

While Chowdhry said Apple is investing in the next big mobile trend—bendable screens—competitors are catching up. Other analysts aren't so sure Apple is that far ahead.

Technology Cycle

There is a "king of the hill game" going on in the tech markets, Orr said. Competition is mounting, and it's unclear how Apple's technology will fit in.

(Read More: Sell Apple, Buy Google—The Next Great Rotation? )

"Either technology becomes invisible, embedded or ingrained as part of bigger solutions, or the market begins to evolve so fast that it's hard to see who the horses are in that race," Orr said.

Apple has always prided itself on building devices that are sleek, intuitive and focused on the consumer. This gave the company a huge lead during the 1980s and '90s when most technology companies were focused on the business consumer.

But the learning curve for competitors is over, and the rivals are getting much better at building devices that consumers like, Sundararajan said.

"Apple has had this run of being dramatically ahead of the competition. ... Now the market has really expanded. Other companies like Samsung have built things that are still not as good as Apple, but they are close enough," he said. "If a competitor's device is a little rough around the edges, that doesn't give Apple as big of a boost as it used to."

(Read More: Google Controls Too Much of China's Smartphone Sector: Ministry )

Sculley said Apple's innovation will rebound.

(Read More: Samsung's New Phone Will Debut on Apple's Turf )

The last 10 years has seen great strides in social media, wireless connectivity, and other areas. Now, the industry is in an era in which "fast followers," such as Samsung, excel, Sculley said.

Samsung is indeed growing, and this has Apple investors worried. The Korean company has made huge strides in the mobile space during the last few years with its Galaxy smartphones.

In fact, Samsung is leading the smartphone market with a 29 percent share to No. 2 Apple's 21 percent, according to IDC research. The March 14 launch of Samsung's Galaxy S4 is expected to cut deeper into Apple's share.

But Apple hasn't just lost market share. It's stock price has fallen more than 35 percent since its all-time high last September.

The first question at last week's shareholder meeting was about gains by Google [ GOOGL 593.95  -5.07 (-0.85%) ]'s Android and Samsung.

Cook said the company was aware of the competition, but success was not selling the most devices. He also said the company was not constraining investment in R&D by a desire to accumulate a pile of cash.

While R&D investing will help, Apple also needs to change its business structure, Sundararajan said.

Culture Shift

There is a change in consumers' behavior that Apple seems to not be grasping, he said.

Consumers are no longer attached to the Apple ecosystem. They have adapted to using multiple app stores and favor customization on their mobile devices. Now, Apple needs to play to this market and create low-cost and easy-to-use products that can be individualized.

(Read More: Apple Smartwatch Out of 'Experimentation Phase': Report )

"It's hard to turn on a dime and reinvent ourselves as something else," Sundararajan said. "Changing an organizational culture like that is going to be really hard."

Analysts anticipate that Apple will launch a lower-cost iPhone to help it win back some share and grow in emerging markets. An Apple smartwatch could also help boost revenue by as much as $9 billion, according to a note from RBC.

(Read More: An Apple Smartwatch May Boost Revenue $9 Billion: Analyst )

"There could be big growth potentially from lower-cost, create-your-own-experience mobile devices, and that is a different paradigm than Apple is used to, and so they need to be prepared for that," Sundararajan said.

Apple has not confirmed a launch of either device.

Chowdhry said Apple's move into bendable technology will push the shares back up and that there will be a "complete shift" in its products in the second half.

Right now, though, it's not likely that Apple will have the next great advancement because it just isn't invested in the latest fringe technologies, Sundararajan said.

"It's not possible for Apple to keep inventing the next amazing product. ... Maybe there will be a wearable device at some point, but chances are it's not going to be Apple that makes the next breakthrough consumer technology," he said. "It's not so much that Apple has lost the secret sauce, it's just that the sauce is less important right now—it's less effective at this point in the evolution of the industry."

(Read More: Silicon Valley Is in a Building Frenzy )

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