German Court Rules in Favor of Apple


A higher regional court in Karlsruhe, Germany, ruled in favor of Apple Inc. (AAPL) in the patent infringement case lodged by Motorola Mobility Holdings Inc. (:MMI). The patent in question is related to 3G wireless networking standards that threatened to disrupt sales of Apple’s iconic iPhones and iPads in the country.

Earlier in December 2011, Motorola had won a temporary injunction against Apple in Mannheim court that forced Apple to stop the sale of iPhone 3G and iPhone 4 models and iPads from its online stores.

Though the recent ruling in Apple’s favor is of a temporary nature, it nonetheless shows Apple’s mettle in the defending of its intellectual rights in a court of law. We believe that these victories are important for Apple because iPhones and iPads are best-selling devices that have been a major revenue contributor for the company over the last few years. Apple surely will be cheering its victories, as bans on the latest iPhone and iPad sales would have resulted in significant revenue loss.

Over the last 12 months, Apple has been highly vocal about saving its intellectual property from misuse and violations. The company has been aggressive in filing lawsuits against other handset makers such as Samsung and HTC, in order to protect its patents. Apple has accused these manufacturers of blatantly copying not only its iPhone and iPad designs, but also its technology.

Apple has been in constant war against Google Inc.’s (GOOG) Android-based smartphones. Through Motorola Mobility, Google has acquired a large number of patents that makes its OS an even stronger offering.

In such a scenario, an injunction against Apple on the ground of violation of technology patents would not only have hurt customer sentiments, but would also have made it difficult for Apple to justify its own patent infringement claims in other lawsuits.

We believe that Apple will remain entangled with further lawsuits, as competition heats up in the mobile and tablet space. We also believe that increasing legal expenses will hurt Apple’s operating profit going forward. Additionally, the impending lawsuits in different countries will remain an overhang on the stock going forward.

Despite these factors, we believe that Apple remains the biggest growth story based on its superior product pipeline, Apps, the recently launched iCloud and iPhone 4S and the upcoming update of iPad and Apple TV. Apple is also well positioned to gain from a loyal customer base and international expansion going forward, in our view.

We maintain our Neutral recommendation over the long term (6-12 months). Currently, Apple has a Zacks #1 Rank, which implies a Strong Buy rating in the near term.

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