Patent Data for Equity Investors

Can one measure innovation with patent data? 

Most companies like to consider themselves innovative, no surprise. Their R&D budget may be growing and management always has a convincing story about the next product cycle, but how much of that story can an investor verify? Can innovation itself be quantified by investors and can we point to a clear performance outcome for truly innovative companies?

Innovation can differentiate products and widen a competitive moat, but translating it into investment signals takes some creative thinking and a deliberate effort. The value added from innovation is hard to quantify through traditional means. R&D budgets are only a proxy: the dollars spent do not always produce new tech, and not all new technology changes the market. Even if innovation is successful, it takes time to play out. In the coming articles, we will use patent data to test when innovation strengthens company fundamentals and whether the share price already prices it in. We will focus on individual companies and look at aggregated industry trends as well. For now, let’s define the source.

What is IP data, and where does it come from?

Intellectual property (IP) data generally refers to aggregated information about intellectual property such as patents, trademarks, and other rights. For investors evaluating technological innovation of public or private companies, patent data provides a good starting point. 

Patent data gives managers looking for differentiated insight an independent record of what a company is working to protect. Our analysis takes it a step further, especially for investors. Beyond the pace and quantity of filings, the question is patent quality and what those inventions could mean for the business and its competitive position in the future.

The data is public. Patent data originates in applications and records published by national and regional patent offices around the globe. The publication of patent filings, the revelation of the invention to the public, is a key part of the patent system. In order to receive a temporary right to exclude others from using your invention (vulgo monopoly), companies have to publish in order to make follow up inventions possible (vulgo the greater good).  Sources for individual data access are for example the  US Patent and Trademark Office, the European Patent Office and WIPO’s PATENTSCOPE. 

Public IP records contain technical descriptions, drawings, applicants and inventors, milestone dates, technology classifications, patent citations and legal status. All of these data points can potentially be useful to investors, but require a degree of interpretation.

Take NVIDIA’s application for “Techniques for parallel execution,” which describes ways to run computing operations in parallel. NVIDIA filed it with the USPTO; the record names Justin Wang and Dz-ching Ju as inventors and NVIDIA as the assignee, or the company to which the rights were assigned. The application sets out the technical method, drawings and claims defining the protection they are looking to get. 

Once published, it becomes public record, searchable through patent databases and solutions like Google Patents. Data providers can then connect that record to NVIDIA, classify the technology and follow related filings, citations and the results of the patent clerk’s examination.

Turning those records into data that can be helpful to investors is not trivial. You must connect all the subsidiaries to listed parent companies, group related filings into patent families, and compare inventions across technologies and time. Simply counting every filing separately can mistake one invention protected in several countries for several inventions.

There are several use cases for this data, depending on who is using it. Patent attorneys and corporate R&D teams use these records to assess technology state of the art and protection. Asset managers, hedge funds, private-market investors and corporate strategy teams use patent analytics to investigate innovation and competitors. For investors, the question is how that innovation could change company fundamentals and competitive position.

Where patent data fits in the alternative data mosaic for the modern investor

Hedge fund managers are voracious consumers of alternative data. They use aggregated credit card transactions to get a read on the quarter and foot traffic to estimate same-store sales. Much of that research focuses on the upcoming print: predicting an earnings surprise or getting a view on guidance can be lucrative in the short term. But average holding periods are much longer and managers investing over several years also need insight on what will drive the business profits and revenues beyond the next quarterly report. This is especially true on core positions that require a deeper understanding not just of the company fundamentals but also its positioning for the future and its competitive positioning. 

Alpha dilution is another problem as widespread use of a dataset can squeeze out the informational advantage the early adopters used to have. When many funds use similar credit card panels from the same vendors to forecast the same earnings release, being right about sales may no longer be enough to generate excess returns. The data can remain helpful as the edge narrows, but investors need a different way of analyzing it to find that ever more elusive edge.

Patent data adds value in a different way, on a longer investment horizon. It gives the investor a view of what the business is developing, where competitors are investing and whether its innovation position is improving. That longer horizon view is often missing from the modern alternative data stack. 

While patent data is underused, that alone does not establish an edge for investors and a lot of work needs to be done. Like mining precious metals in a mine, value is derived from turning public records into comparable company insights and analyzing the data on a company in the context of the industry it is competing in.

Patent analytics for fundamental investors looking beyond earnings

For a fundamental manager, the question is what will drive the business two or three years from now. They are either building a thesis or substantiating a story they have already developed. For example, if management is pitching a new growth market,  patent analytics can show whether the company is building a relevant portfolio, how its patent quality compares with peers and which competitors are moving into the same space based on their IP investments. That gives the analyst evidence to challenge the story and make better assumptions about future revenue, margins and the durability of the moat. In future articles we will present evidence linking patent activity to fundamentals. 

Patent data for systematic investors testing longer-term alpha signals

For a systematic manager, patent data offers a longer-term input to test in their quant models  alongside value, quality and momentum factors. A team can rank companies on patent quality or changes in innovation activity, then test whether those measures add information beyond the signals already in the model. The test needs point-in-time patent data, using only what was public at each date. 

About Quant IP and SIA

Quant IP is an alternative data provider delivering patent data and innovation analytics built for financial markets. Its Solution for Innovation Analytics (SIA) helps fundamental and thematic investors compare companies, investigate technology exposure and assess competitive position. Systematic teams can evaluate company-level or invention-level patent data feeds for their own research.

Choose a company from your watchlist or test your investment thesis in our 30-minute Innovation Reality Check. 

See what the patent data adds to your existing view.

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