After a patent dispute with medical device firm Masimo (MASI), Apple (AAPL) has ceased sales of its latest Apple Watch models — the Series 9 and Ultra 2 — containing a blood oxygen app. D.A. Davidson Managing Director Gil Luria argues this ruling spotlights existing concerns that Apple has fallen behind in innovation.

While seeing minor financial impacts, Luria calls the halt "an embarrassment for Apple" reflecting stalled creativity especially as the newest Apple Watch represented rare new advancements as compared to recent generations of the iPhone. With competition innovating quicker, Luria contends Apple has been "a little stuck."

Luria believes renewing revenue growth and market leadership depends on Apple getting "unstuck on the innovation front" after a years of similar smartphone designs that fail to "compel" annual upgrades unless damage occurs.

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Video Transcript

- Our next guest thinks Apple's strength is keeping users within its ecosystem while its competitors are winning in innovation. For more on how the tech giant is shaping up into 2024, Gil Luria-- D.A. Davidson Managing Director joins us now. Good morning, Gil. Over in your note, you called this an inopportune time for this to happen to Apple, particularly, with this crucial holiday week underway. How do you see this sales glitch play out into early 2024?

GIL LURIA: So the impact to Apple isn't going to be that material. They've been able to hold off. They only need to take it off their own shelves December 24. They're taking it off the website today, which means it's only a very narrow demographics that's actually going to lose sales. We're talking about husbands that wait until the last minute to buy their wife a gift that instead of buying the Ultra 2, they're going to go to the other part of the mall and buy something else.

That's not a lot of sales, but this is still embarrassing. It shouldn't come to this. These cases always get settled and somebody decided to gamble on the appeal and not settle with Massimo. And this is an embarrassment for Apple. Again, the sales loss may not be material, but it's still embarrassing. They're going to have consumers confused. They're going to go to the store, they're going to want the Ultra 2 or the Watch 9.

They're not going to be able to buy it. By the way, they can buy it at Best Buy or at other retailers, but they won't be able to buy at the Apple Store. You never want to frustrate your customers. That's really going to be the outcome here. And it ties to a bigger theme of innovation that you touched on too.

- Yeah. Gil, as you're thinking about that innovation, is Apple stock still sexy if they continue to have this design mental block, as you call it?

GIL LURIA: You know, iPhone hasn't really changed since version 12. There's only been very minor tweaks to it. That's the flagship product. They need to do more. The watch had some advances, some cool new features in the Ultra 2. But the form factor hasn't really changed. You mentioned earlier the Vision Pro. The Vision Pro is really just a developer tool, it's not really a consumer product at $3,500.

In the meantime, other companies are innovating with form factor. With folding phones, with glasses that have these augmented features, with AI pins. Apple has usually been a quick follower on these new innovative form factors. And right now, it appears to be a little stuck. And for them to get revenue growth in their hardware business, they need to get unstuck on the innovation front.

- Let's talk about that a little bit. Do you necessarily think that Apple needs to come out with a foldable handset like Samsung did?

GIL LURIA: Not necessarily, but they need to give us an iPhone that looks different. You can't have the 12, the 13, the 14, and the 15 iPhones look almost exactly the same with very minor changes to the camera, to the zoom, to how the island floats. That's not enough to compel people to upgrade ahead of a phone breaking down.

And unfortunately for Apple-- fortunately or unfortunately for Apple, fortunately for consumers, iPhones don't really break down. They've become so rugged and so useful even with the software upgrades that they get every year that they need new reasons to compel people to upgrade. They can make the screen bigger, they can make it thinner, they can make it transparent. They need to do something with the form factor to accelerate an upgrade cycle.