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 (AAPL -1.22%) 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 (GOOG -1.10%) (GOOGL -1.23%) and Microsoft (MSFT -1.27%) 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.

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.