Apple Does More With Less

Apple (NASDAQ: AAPL  ) has a reputation for its minimalist designs. Those minimalist designs are produced from a minimalist research and development budget. In its fiscal year 2013, Apple spent just $4.5 billion on R&D. Comparatively, Microsoft (NASDAQ: MSFT  ) spent $10.4 billion on R&D last year; its biggest competitors in smartphones, Google (NASDAQ: GOOGL  ) and Samsung (NASDAQOTH: SSNLF  ) , spent $6.8 billion and $10.8 billion, respectively, on R&D last year.

Rapidly increasing research
Before the bears rush in and start pointing to Apple's diminutive R&D expenditure as a sign Apple can no longer innovate, it's important to note that R&D expenses increased 32% year-over-year in 2013 on top of a 39% increase in 2012. Not to worry, Apple isn't stretching its budget to push innovation either. R&D expense has remained fairly consistent as a percentage of net sales.

Still, Apple funnels significantly less of its revenue back into research and development compared to its peers.

Company	Revenue	R&D Expense	R&D/Sales
Apple	$170.910 billion	$4.475 billion	2.6%
Microsoft	$77.849 billion	$10.411 billion	13.4%
Google	$50.175 billion	$6.793 billion	13.5%
Samsung	$187.670 billion	$10.760 billion	5.7%

All numbers from 2012 except Apple's (2013)

This is a benefit of Apple's focused premium product strategy. With fewer product lines to support compared to Samsung, and fewer divisions compared to Google and Microsoft, Apple is able to increase revenue without having to spend billions of dollars on products and divisions that don't generate significant revenue.

Samsung offers hundreds of different phones; Apple offers three -- all from the same product line. Additionally, Samsung supports several of low margin consumer electronics products seeing declining sales such as televisions.

Interestingly, both software companies, Microsoft and Google, reinvest about the same percentage of sales into R&D despite the different growth stage of each company. Microsoft is much cheaper than Google on a P/E basis, implying that Microsoft's research team is much less efficient than Google's and Apple's.

data by YCharts

Can it continue?
Apple's CEO Tim Cook opened the company's fourth quarter conference call with prepared remarks referencing "significant opportunities" in "both current product categories and new ones." Of course, this isn't the first time he's teased new product releases.

Indeed, 2014 will be a very important year for Apple to enter into a new product category. The company has entered a new category every two to four years over the last decade or so (iPod, iTunes store, iPhone, iPad). With sales growth of the iPad and iPhone slowing in 2013, the time is ripe for the company to enter a new product category.

Apple's R&D expenses have increased in line with revenue growth over the last two years despite the lack of a new product category. This would indicate the company is working on different products, as it doesn't take more research to support the same number of products.

Yet the market is pricing Apple as if it's done innovating, and another growth category at the company will never materialize. At a forward P/E of just 11, Apple presents great value for any company, let alone one with a track record of releasing new products that spur further revenue and profit growth.

The price of innovation
Analysts expect Apple's revenue to grow just 7.3% in 2014. This indicates that the Street doesn't expect Apple to release a breakthrough product next year. Still, the company will likely spend another $3.67 billion (2% of sales) to $5.82 billion (3.2% of sales) on developing new products. With that amount of spending to support such a small product line, it's hard to imagine the company won't release something new in the near future.