Over the last several years, Apple (NASDAQ:AAPL) has continued to dramatically increase its spending on research and development.
Fully funded research and development activities are critically important to a company's long-term success. Such spending allows companies to both significantly enhance existing product lines (in Apple's case, this would include iPhone, iPad, Mac, and Apple Watch) while also working to develop entirely new product categories.
Additionally, Apple has brought an increasing amount of technology development in-house to reduce its dependence on third-party suppliers and to increase the amount of proprietary technology that it owns, enhancing its competitive positioning in the marketplace.
During fiscal year 2017, Apple once again cranked up the amount of money it's investing in research and development. Here's why investors should care.
A billion-and-a-half boost
In fiscal year 2017, Apple spent $11.58 billion on research and development activities. That was a nearly $1.6 billion increase from the $10 billion that the company spent during fiscal year 2016. In the year before that, Apple spent just $8.07 billion on research and development.
This means that over just two short years, Apple increased its research and development spending by about $3.5 billion.
Apple isn't yet the biggest R&D spender in tech, though; that honor goes to search giant Alphabet, which spent $13.95 billion in research and development in calendar year 2016 and is on track to spend even more this year (Alphabet spent $12.32 billion in research and development in just the first nine months of 2017 alone).
However, it's clear that Apple is still increasing its investments at a furious pace, no doubt to try to extend its leadership positions in the smartphone, tablet, and PC markets, feed its investments in services, Apple Watch, and new accessories, and increase its bets on new areas like augmented reality and possibly autonomous driving.
Apple, of course, isn't going to publicly disclose where exactly that increase came from, but it did say in its form 10-K filing that the research and development bump in fiscal year 2017 was due to "increases in headcount-related expenses and material costs to support expanded R&D activities."
Apple's clearly investing heavily in its future.
What this means for investors
Ultimately, Apple's increased spending means that the product portfolio that we'll see coming out of the company in the years ahead will continue to get better.
Now, I know what you're thinking: Of course new products will be better than the ones that came before them, otherwise it wouldn't make sense for Apple to release them in the first place.
That's not quite what I'm trying to convey, though. What this expanded spending will allow Apple to do is to make bigger strides in each generation so that each new product generation is better and more competitive relative to what it faces in the marketplace than prior products were.
Perhaps the best example of this is the iPhone X. For the first time in what seems like years, Apple has released a phone that not only achieves leadership across every relevant technology vector, but it incorporates fundamentally new, paradigm-shifting hardware and software that's unmatched by anything currently in the market today.
I think Apple's increased spending will allow it to deliver more such iPhone X-level product innovations going forward, and because Apple is so financially successful, increasingly fewer companies will be able to compete with Apple in its core businesses over time.