Apple – Stocking filler.

Apple will find a way out.

• Apple has received an unwelcome Christmas present as it faces a ban on importing Apple Watch products in The USA as a result of infringing Masimo’s blood oxygen patents but I am pretty sure that it already has a workaround ready to go.
• The ITC has issued a “limited exclusion order” against the Apple Watch Series 9 and the Ultra 2 following a January finding that these products infringe patents owned by medical device maker Masimo.
• Apple can always settle with Masimo but its historically pugilistic attitude towards patent infringement usually means that it won’t settle unless it has no other choice.
• This is precisely what happened in 2019 when Apple settled with Qualcomm and resumed paying royalties on the iPhone as it could not source the 5G chips it needed from anywhere else.
• I suspect that this situation will hinge on whether or not the ban actually goes into force and whether or not Apple has a decent workaround ready to go.
  • First, the ban is supposed to go into force on December 25^th but Apple has pre-emptively ceased online shipments and will halt sales from its stores on December 24^th.
  • This pretty much ensures that the all-important Christmas sales season will have gone as planned but now it has to worry about calendar Q1 2024.
  • The ban currently sits on the desk of the US President who has the power to veto it, but an intervention at this level is unusual but not unheard of.
  • Assuming there is no veto, Apple will need to disable the feature in order to be able to resume shipments or issue a workaround.
  • Second, The workaround. Given that the prospect of an ITC ban has been very real for 11 months, I am pretty sure that Apple has a workaround ready to go.
  • In the first instance, this will involve a software update that will change the methodology of blood oxygen monitoring such that Masimo’s patents are no longer infringed.
  • However, Masimo claims that to workaround its patents will require a hardware change which complicates the situation significantly as existing devices cannot be rectified.
  • I think that the worst-case scenario is an update that temporarily disables the feature in USA devices.
  • It is unclear whether the infringement includes hardware, but I am pretty sure that Apple will have a go with software before it makes a hardware change.
• Apple is pursuing a range of “legal and technical options” which means that in addition to the workaround, it will also be seeking to have the ban stayed pending its appeal of the infringement ruling.
• These are not unusual as an import ban can be very damaging to a company even if it wins on appeal.
• Hence, I suspect that if Apple fails to win a stay, and the software update does not work, it will probably settle with Masimo and pay it a per-unit royalty.
• Consequently, while the Series 9 and Ultra 2 may not be available during the holiday period when business kicks off again in January, Apple is likely to have found a solution to this problem.
• The share price is barely registering the impact of a ban of the Apple Watch into The USA reflecting my view that Apple will find a solution before there is a meaningful halt in device shipments.
• That being said at 29.9x 2024 PER, the stock is already pricing in a rosy recovery following the downturn triggered by high interest rates and inflation.
• There are plenty of other places to look in the technology sector especially if one places importance on AI as a differentiator in the future.