U.S. stocks are lower on Monday afternoon, with the Dow Jones Industrial Average (^DJI -0.12%) and the S&P 500 (^GSPC -0.58%) both down 0.28% at 1:30 p.m. ET.
Bloomberg Businessweek published a story this morning announcing that "Apple Is Getting More Bang for Its R&D buck," which focuses on a(nother) way in which the iPhone maker is different:
Apple's success belies the conventional wisdom that a leading tech company must reinvest a sizable chunk of its sales in R&D or risk being overtaken. Apple has never subscribed to that philosophy. Steve Jobs said in 1998 that "innovation has nothing to do with how many R&D dollars you have." He liked to point out that when the Mac was introduced, IBM was spending about 100 times more than Apple on research.
As the article points out, Apple spends significantly less on research and development as a percentage of its revenues than its peers. The following table shows that same percentage for all technology companies with a market capitalization greater than $100 billion:
|
Company/TTM Revenues |
R&D Expense As a % of Revenues |
|---|---|
|
Facebook |
29% |
|
Intel |
21.8% |
|
Alphabet (formerly Google) |
16.1% |
|
Oracle |
14.7% |
|
Microsoft |
13.2% |
|
Cisco |
12.5% |
|
IBM |
6.2% |
|
Apple |
3.5% |
Source: Bloomberg.
The first observation to make in trying to explain Apple's "laggard" position is that it's not obvious that a company needs to maintain R&D at a constant percentage of revenues at all levels of revenue, even if we assume it wishes to achieve the same result in terms of revenue growth, earnings growth, growth in market value, or another metric.
Keep in mind that, at $233 billion, Apple's trailing-12-month revenue is more than twice that of the No. 2 technology company by revenues (HP Inc, with $103 billion), such that 3.5% of revenues translates into an $8.1 billion R&D spend -- 75% more than the equivalent figure for Facebook.
In fact, in dollar terms, only three companies spent more on R&D over the trailing 12 months than Apple: Intel Corporation ($12.0 billion), Microsoft Corporation ($11.9 billion), and Alphabet Inc ($11.6 billion).
(Incidentally, in an extraordinary reversal that illustrates the tectonic changes that have transformed the technology industry since the 1984 launch of the Macintosh, Apple now significantly outspends IBM on R&D in dollar terms [IBM: $5.2 billion]).
But why the fuss about R&D to begin with? It's not about straight earnings growth, if we're to believe the results of a 1989 paper published in Research Technology Management, which concluded that "no direct relationship and subsequent profit growth is found," based on a study of 800 companies between 1976 and 1985.
The same journal published another paper five years later, according to which "R&D affects only a fraction of a corporation's growth -- but that fraction is the one that most affects competitive advantage and shareholder value."
I think that observation might be at the crux of why the market attributes to Apple a higher multiple of market value-to-R&D expense over all but one technology company in the S&P 500 (Verisign, in case you're wondering).
While it is difficult to say this with absolute certainty because the company is highly secretive, Apple appears to be remarkably disciplined with regard to R&D, with the focus on funding projects that will extend its competitive advantage and increase the value of the existing Apple ecosystem.
That approach contrasts with Google and Facebook, for example, which appear to be more willing to fund research projects that look more speculative, or that are not directly related to their core businesses. For Apple, the R&D dollar doesn't fall far from the tree, as it were.
