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There are so many success factors for software companies. But patent activity is cited pretty rarely. Nevertheless there are good examples showing how a consistent innovation strategy based on patents is a good indicator for exceptional returns. I plotted the historical values for our Quant IP Innovation Score against the market cap of Adobe (see above).

The Quant IP Innovation Score looks at the whole innovation process, from R&D spending to patent rights, and measures growth, efficiency and quality to benchmark companies versus its industry peers. The score then compares the market valuation and gives high scores for stocks where the companies relative innovation strength is relatively cheap to buy.

At Adobe we can see how effective that approach can be in timing entry points for an investment. The company is a dinosaur of the industry and has been a terrific investment for long term investors. But even though no one who invested in Adobe share over the long term will complain about returns, there where good and amazing entry points over the last 15 years.

Investors putting their money to work in the three months with the lowest value for the Quant IP Innovation Score (March 05, April and November 06) experienced returns over the following 5 years of 113, 72, 57 percent respectively not bad – but dwarfed by returns for investors entering at the highest reading of the score (July 14, August 14, January 14) with 421, 386 and 411 percent:

Table Adobe 1

The Innovation Score does not work always that good. But this time it seems to have catched the fact that Adobe has been innovating faster and better then its peer while the relative market cap did not reflect that. The Innovation Score indicated that just before the phenomenal run of the stock.