Is It True that Apple Is Spending ‘Dramatically Below Peers’ on Innovation

Is It True that Apple Is Spending ‘Dramatically Below Peers’ on Innovation? Discuss!

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Is It True that Apple Is Spending ‘Dramatically Below Peers’ on Innovation? Discuss!

Apple has long been an icon of American innovation. The iPhone, Mac, iPad, AirPods, and other innovations have contributed to the company’s nearly $2 trillion market valuation, making it America’s most-valued company by a wide margin.

But Bernstein analyst Toni Sacconaghi asserts that Apple (ticker: AAPL) is underspending on innovation relative to its peers. And it likewise is spending far less than rivals on the acquisition of new technology developed by others.

Sacconaghi points out in a research note on Tuesday that Apple was spending just 2.2% of revenue on research and development, “dramatically below peers,” when CEO Tim Cook succeeded Steve Jobs in 2011. It has been moving aggressively to catch up ever since.

R&D growth has outstripped revenue growth by a factor of three since 2012 and now amounts to 7% of revenue. But Sacconaghi says that Apple, nonetheless, continues to underspend peers and he thinks comparisons with rivals argue for spending 10% or more of sales on research and development.

Meanwhile, he notes that Apple has spent just 2% of free cash flow on mergers and acquisitions since 2012, versus the 25% of free cash that peers spent on deals. He notes that in the period from 2012 through 2019, Apple generated $436 billion in free cash flow, and spent just $6.9 billion on deals, choosing instead to return most of that to shareholders in the form of buybacks and dividends.

“While share repurchases have historically been an effective use of cash and enabled Apple to grow EPS, we worry about potential parallels with IBM, who we believe underspent on innovation and overspent on buybacks, when it should have been reinventing itself amidst slowing product and services growth as computing moved off-premise,” Sacconaghi writes.

[wpdiscuz-feedback id=”gam6aj519k” question=”Is it possible that Apple’s platform/ecosystem (i.e. 3rd party app makers) allows them to get away with spending less on R&D?” opened=”0″]“The combination of low R&D spending and low M&A suggests that Apple may still be ‘underinvesting’ in innovation versus its peers,”[/wpdiscuz-feedback] he writes. “We continue to believe that Apple making large acquisitions is unlikely. Could the recent surge in Apple’s R&D spending presage new product innovation? Hard to say. On the one hand, we see potential in the sheer magnitude of Apple’s spending ($60 billion over the last 5 years) and the company’s focus on potential new categories,” citing autonomous driving and augmented reality.

On the other hand,” the Bernstein analyst says, “Apple’s R&D budget last year alone ($16 billion) was greater than its cumulative R&D spend from 1999 to 2012, and yet the pace of new product introductions doesn’t appear to have accelerated.

Sacconaghi maintains a Market Perform rating on Apple shares. “On the one hand, we find it somewhat difficult to see much upside to Apple’s valuation on a long-term basis. On the other hand, we believe the stock is now more or less ‘de-risked’ on a near-term basis. Apple’s stock has historically fared well in advance of new iPhone launches and sell-side expectations for the September 2021 fiscal year still look beatable.”
Apple, as a matter or policy, declines to comment on analyst notes.  The stock rose 0.8% to $462.25 on Tuesday. The Dow Jones Industrial Average fell 0.2%.
Adapted from Barrons

19 thoughts on “Is It True that Apple Is Spending ‘Dramatically Below Peers’ on Innovation? Discuss!”

  1. conrad pranze villas

    who we accept underspent on development and overspent on buybacks, when it ought to have been reexamining itself in the midst of easing back item and administrations development as registering moved off-premise

  2. I never thought I’d see the day where Apple would spend less on innovation than other competitors. It might be a common theme of big name companies to direct more attention to costs and sales once they’ve illuminated the spotlight. Hopefully this message and others will serve as a wake up call for Apple to bring back more focus on idea generation.

  3. From my perspective $2T is no joke and you call it below? Then again we are talking about tech giants here so who knows. For me though as long as that money goes to new Product development I think anyone would be happy. A healthy and blooming business is always a good thing.

  4. I think it might be true that Apple spends less on innovation. The reason being that they maintain some of their product design for a very long time before changing.

    1. Bradley Pallister

      When comparing Apple to other big tech companies such as Alphabet, Microsoft, and Facebook, the iPhone maker invests substantially less money than its peers in research and development, especially when measuring R&D spending as a percentage of revenue. The question is, Is Apple underinvesting in R&D, or do things just work differently for them?

      Steve Jobs was clearly one of the most successful and innovative business leaders in history. His vision and philosophy are still a big part of Apple’s culture, and he never believed that money was the most important factor when it came to driving successful innovation. In an interview with Fortune in 1998, Jobs noted: ‘Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100x more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.’

      You can’t just buy your way to successful innovation when you don’t have the vision and skills, and utilising the Innovation Value Pyramid as a framework will help you on the same journey.

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