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

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

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.

“The combination of low R&D spending and low M&A suggests that Apple may still be ‘underinvesting’ in innovation versus its peers,”
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?x
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
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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

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.

Last edited 23 days ago by Maury Cheskes

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.

Innovation has driven Apple to heights that were never thought possible. Apple remains the pride of America without a doubt.

Apple always has a new product development in the works. That’s what makes them stand out!

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.

Apple’s problem solution approach is quite unique as compared to its peers. That could be the reason they are at the position they are.

Apple actually puts a lot of resources into physical product development. Their R&D is among the best in the world.

The environment at Apple is one that greatly fosters idea generation. That coupled with the passion of the employees makes it a market leader.

Apple remains the poster child for innovation in my eyes. No company even comes close.

Apple’s idea commercialisation is second to none. I am surprised they also don’t spend so much on innovation.

By simply observing Apple’s practices I can learn how to make money from my idea. There is so much to learn from the company.

Whenever Apple has a new product development in the works the whole industry gets excited. They are such a game changer!

I never fail to get wowed by Apple’s product design. They have some of the best talent in the world.

The myths of innovation is pretty cool. I kept wondering why is innovation so difficult to roll on. Thanks for this good post.

Apple has always been in the top lists of Innovation research, I would had never imagined that it were underinvesting compared to other companies.

Would love your thoughts, please comment.x