Relative to many of its tech giant peers, Apple's (NASDAQ:AAPL) research and development spending is actually quite conservative, both in absolute dollars as well as when measured as a percentage of revenue. This is one of the key benefits of focusing on product depth over breadth. Microsoft in particular has a bad reputation about frivolously investing in R&D projects that have remote prospects of commercialization, as cool as the projects may be.
The Mac maker has been ramping up R&D spending in recent years, and it just hit a new high of 6.5% of sales last quarter.
Here's R&D expenses in absolute dollars.
To be clear, this is not a new trend, and CFO Luca Maestri has previously laid out four specific reasons why R&D expenses continue to rise: the product portfolio is growing, Apple is investing heavily in services to grow the services business, it is increasingly in-sourcing development of core technologies, and the company's building stuff it won't talk about yet. Still, it's a line item on the income statement that investors should monitor on a regular basis.
If I had to guess as to which projects were priorities for Apple, the top two would be an augmented reality (AR) headset and autonomous driving systems.
The iPhone will be a bridge to AR
CEO Tim Cook is already having trouble containing his excitement over AR. "One of the most exciting and most promising announcements from WWDC was the introduction of ARKit, a new set of tools for developers to create augmented reality apps," Cook said in his prepared remarks during yesterday's earnings call. "It's still early in the beta period, but it's clear that ARKit has captured the imagination of our developer community."
When asked about possible "near-term applications" that third-party developers might come up with, Cook said:
Mike, that is a great question. Since we -- and I could not be more excited about AR and what we're seeing with ARKit and the early going. And to answer your question about what category it starts in, just take a look at what's already on the web in terms of what people are doing and it is all over the place. From entertainment to gaming, I've seen what I would call more small business solutions. I've seen consumer solutions. I've seen enterprise solutions.
I think AR is big and profound. And this is one of those huge things that we'll look back at and marvel on the start of it. So I think that customers are going to see it in a variety of ways. Enterprise, it takes a little longer sometimes to get going, but I can already tell you, there's lots of excitement in there, and I think we'll start to see some applications there as well. And it feels great to get this thing going at a level that can sort of get all of the developers behind it. So I couldn't be more excited about it.
There are some pretty great demos already out there, as developers have already started tinkering with ARKit.
Apple is cleverly using the iPhone as the bridge to an inevitable AR headset. By starting now, it can build a repository full of AR content and apps that can quickly be repurposed to an AR headset at a later time. Given Cook's overt enthusiasm, there should be little doubt that a fair amount of R&D spending is being allocated here.
Cars are "only one" use case of autonomous technology
Only recently did Cook confirm that Apple is investing heavily in autonomous driving systems, even going as far as referring to it as a "core technology." In a letter to the National Highway Traffic Safety Administration last year, Apple also said, "The company is investing heavily in the study of machine learning and automation, and is excited about the potential of automated systems in many areas, including transportation." When asked about autonomous systems, Cook made some cryptic remarks, hinting at use cases beyond transportation (emphasis added):
In terms of autonomous systems, what we've said is that we are very focused on autonomous systems from a core technology point of view. We do have a large project going and are making a big investment in this. From our point of view, autonomy is sort of the mother of all AI projects. And the autonomous systems can be used in a variety of ways, and a vehicle is only one, but there are many different areas of it. And I don't want to go any further with that. But thank you for the question.
Autonomous driving systems require massive R&D investments, both in terms of hardware and software. Prototypes have already been spotted, sporting the familiar LIDAR systems that characterize (non-Tesla) autonomous cars.
Don't expect that R&D spending to come down anytime soon.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.