Proof That Apple, Inc. Is Investing in Innovation

Phil Schiller introducing Mac Pro at WWDC 2013. Source: Apple.

As he introduced the Mac Pro at the 2013 Worldwide Developers Conference, Apple (NASDAQ: AAPL  ) marketing chief Phil Schiller found himself defending his company as skeptics had been arguing that it had lost its innovative touch following Steve Jobs' death.

The most common bearish argument was that Apple hadn't launched a game-changing product since 2010, which is a ridiculous standard to hold the company to. Investors shouldn't expect any company to constantly release a string of market-defining products, even Apple.

At the same time, investors do want confirmation that Apple continues to invest in future innovation. Well, look no further than this chart of R&D spending over the past seven years.

Source: SEC filings. Fiscal quarters shown.

Apple has been steadily ramping up its R&D spending for years as its business has grown; R&D headcount has ballooned, and many of the recent acquisitions have been all about buying talent.

R&D spending has also spiked over the past two quarters as a percentage of sales. Last quarter, Apple spent 4.3% of revenue on R&D, the highest level in more than seven years.

Source: SEC filings. Fiscal quarters shown.

That's a good sign as investors head into Apple's fall product cycle, particularly as expectations are running especially high this year for Apple. Investors are hoping that Apple will unveil at least one market-defining product as it jumps into a new product category: the iWatch.

Apple TV still feels as if it hasn't realized its full potential, even though speculation of a full-blown Apple TV set has calmed down quite a bit in recent years. The two larger iPhone models we expect to see probably took a lot of legwork to design and engineer, considering the expected shift to notably larger form factors.

Hey, big spenders
In the grand scheme of things, $1.6 billion in R&D spending isn't all that much. It's a lot for Apple, but Apple is known for its extremely efficient and conservative R&D spend. Apple's unwavering commitment to focusing on product depth instead of product breadth helps it spend wisely while minimizing capital waste.

Rivals such as Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) and Microsoft (NASDAQ: MSFT  ) spend considerably more on R&D, both in dollar terms and as a percentage of revenue, and it's debatable how much they have to show for it.

Company

R&D (% of Revenue, Most Recent Quarter)

R&D (Most Recent Quarter)

Apple

4.3%

$1.6 billion

Google

14%

$2.2 billion

Microsoft

13.4%

$3.1 billion

Source: SEC filings.

This spending differential in dollar terms used to be much greater, but Apple's recent ramp-up in R&D spend has narrowed the gap. As a percentage of sales, the difference is still quite prominent.

Google is famous for investing in insane ideas like Internet balloons, environment-sensing tablets, and free lunches for employees. Google's moonshots are spawned from long-shot bets, but the downside is that many of these ideas may never become commercially viable, and shareholders are on the hook for paying the bills. The same goes for Microsoft, whose applied science lab builds downright amazing things that may never make it to market.

When Apple services chief Eddy Cue said the upcoming pipeline is the best in 25 years, he set a rather high bar for the Mac maker to clear. At least investors know that Apple is putting its money where its mouth is.

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Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On July 26, 2014, at 4:19 PM, amz wrote:

    AAPL isn't in the same R&D weight class as GOOG or MSFT, but they are masters of the "last mile" -- taking a technology and making it consumer-ready. Jobs' successful hucksterism hasn't fully filtered out of the company blood, either.

    The problem is that AAPL really only does incremental innovation and repurposing of tech. At the core, the iPad, for example, is just a big phone, not a truly different device.

    AAPL is a Michelin chef making a four course meal. GOOG and MSFT each have a dozen Michelin chefs in a dozen kitchens, each making ONE course in their area of specialty. The trick for them is to get the right four courses to serve together -- which is one of MSFT's big problems. Another is that MSFT doesn't always pay attention to the fickle palate of the public (while AAPL seems able to convince people that kale-infused birthday cake is good).

    GOOG and MSFT have far more innovation headroom than AAPL, not just in dollars, but in intellectual curiosity and capability. If Satya Nadella, as executive chef, can steer those dozen kitchens, MSFT is back on top.

  • Report this Comment On July 27, 2014, at 7:57 AM, mds wrote:

    THANK YOU FOR SHOWING SOME TRUTH!!!

    For two years I have been stating that these investments are for the following reasons:

    1) Keep the fox out of the hen house by becoming vertical and secretive.

    2) Control quality and production capacity using assembly lines and equipment solely dedicated to AAPL.

    3) Investment in factories and equipment will (and has) exponentially increased profit margins.

    4) Reduce production time (which is now two weeks) and enjoy stellar sell through. (currently 99% of shipments.)

    All of these factors have been largely ignored and replaced with lies, rumors; and criminal manipulation on a widespread basis.

    In the end you can see the liars....they are the one's with the egg all over their collective faces.

  • Report this Comment On July 27, 2014, at 6:49 PM, nealdoughty wrote:

    Excellent post, MDS.

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