Investors and consumers expect a lot from every Apple (NASDAQ: AAPL ) earnings report. With many questioning if the company is still a growth story, or more of a growth and income play, Apple is hurting itself by avoiding two fairly obvious choices. With Google (NASDAQ: GOOG ) growing and expanding, and Microsoft (NASDAQ: MSFT ) trying to reinvent itself, Apple can't afford to continue on its current path.
The Tim Cook plan
One of the strengths of the Steve Jobs era was the company's ability to introduce innovative products and surprise the market. Though Apple has taken evolutionary steps with each of its products, the company hasn't produced anything completely new or category-defining in a couple of years.
Apple has maintained its ability to generate billions in cash flow by moving products forward. However, at some point, the company must create something new to continue growing at a respectable rate. Tim Cook has claimed that there are exciting products in the pipeline. But, will these products be revolutionary (or at least evolutionary)?
Time to pay up
Technology companies must spend a significant amount of money on research and development to keep their edge. It just makes good logical sense. A company that spends on R&D has the opportunity to produce several hits from these ventures.
If Google didn't spend on R&D, we wouldn't have projects like Android, Glass, and more. In the company's recent quarter, Google spent 14% of its revenue on research and development, and has consistently spent over 10% on R&D in the past.
While Microsoft might not be known for strong innovation, the company is the only one of the aforementioned three that offers the same operating system on its computers, tablets, and smartphones. Google's Android can run on all of these systems, but Android on a desktop is still in its infancy.
Microsoft also has innovated with its Office software in the most recent iteration. With Office 365, users can download and use Office on PC, Mac, and even use web apps to create, edit, and share their documents with others. Similar to Google, Microsoft spent 15% of its revenue on R&D in the current quarter, and it's this type of spending that should allow the company to continue to innovate in the future.
By contrast, Apple only spent 3% of revenue on R&D in the current quarter, and has consistently spent less than 5% over the last several quarters. It's not hard to argue that Apple's lack of real innovation over the last few years could be directly correlated to the company's relatively low percentage of R&D spending. The company needs to increase its R&D spending to try and create the revolutionary products that both consumers and investors expect.
Problem No. 2-Boring is a good thing
The second issue that Apple needs to fix is the company's unpredictable product release schedule. In the last few years it has been difficult to figure out when Apple would release updated versions of their two biggest products, the iPhone and the iPad.
In 2013, Apple released the updated iPhone in September, and updated the iPad lineup in November. In 2012, there were two different updates to the iPad lineup. In 2010 and 2011, the iPhone update varied between October (2011) and June (2010). Updated iPads have come as early as March 11 (2011) and as late as November 12 (2013).
The point is, Apple's unpredictable release schedule creates lumpy demand and makes consumers question when they should upgrade. This frustration can cause customers to jump to other devices because they don't know how long they will have to wait for Apple to release the "next big thing."
News outlets are already beginning to guess about Apple's next releases. Some are expecting a new iPhone 6 as early as May 2014, and a new larger iPad by October. The bottom line is, consumers have trouble buying a new device if there are rumors of a better device right around the corner.
Google doesn't have this worry because its army of device manufacturers each have different release schedules. Microsoft's Windows Phone is supported by different manufactures as well. Only Apple has the blessing and curse being the sole provider of both its hardware and software.
When you combine Apple's relatively low R&D spending, and lumpy demand due to uncertain product releases, you get nervous investors. Apple's yield of over 2%, and the hope that Apple's "next big thing" will breathe new life into this growth story seem to be supporting the stock.
However, if Apple continues its unpredictable release schedule, and doesn't surprise critics and customers alike with great new features and devices, the company's loyal customers may decide to jump ship. Lackluster new product development, and the potential for frustrated customers, could spell the end of investors patience with the stock.
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