Few fields move as rapidly as technology. Businesses creating outsized profits and returns for shareholders quickly get a bull's-eye painted on their back as they become targets of other companies looking to disrupt their products by selling cheaper alternatives that still prove "good enough." Not only that, but even if a company continues to dominate its particular field, other changes in technology can shift spending away from their products. Think about how Microsoft still dominates PCs but feels pressure from the sales shift toward mobile devices such as smartphones and tablets.

With that in mind, today we're looking at how Hewlett-Packard (NYSE: HPQ) innovates. 

Technology companies can innovate either through acquisitions or by spending more money on research and development. We'll compare AMD's spending in these areas with that of its closest peers and assess whether the company is investing enough in its future.

Research and development
Over the past five years, HP has spent an average of 3% of revenues on R&D. . The following table summarizes how HP's R&D R&D expenditures relative to revenues compare with some of the company's closest peers.





























Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months. Dates above are calendar years; yearly total is for company fiscal years closing in that period.

HP's R&D expense is much higher than Dell's but still severely lags IBM. In years past, that wasn't seen as a critique, as Mark Hurd increasingly improved profits. However, after his scandal-tinged departure, HP has been forced to re-evaluate itself. After promising broad changes that would involve more of a focus on high-margin software, new CEO Leo Apotheker has recently sharpened a focus on cutting costs to best preserve aggressive guidance. If HP wants to continue evolving into a full-service IT firm on par with IBM, it'll need to continue making further investments into research.

In technology, some of the best companies have turned growth through acquisitions into an art. IBM has adeptly spun off capital-heavy businesses such as the hard-drive and PC segments, while it focused on acquiring additional services and software expertise that have transformed its business model.

On the opposite end of the spectrum, HP is often criticized for underinvesting in R&D, to the point that it has to overpay on acquisitions to catch up with its competitors.

Investors should remember, most of all, that companies are valued by the cash flow they can bring in for their shareholders over time. If companies need to continue making purchases in perpetuity to keep growing, that amounts to a reduction in cash flows, and investors should treat acquisition spending as a continuing outflow against cash flow.

Let's take a look at HP's free cash flow over the past five years against cash spent on acquisitions.

Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months. Dates above are calendar years; yearly total is for company fiscal years closing in that period.

HP is highly acquisitive. In years past, the company's major acquisition was a $17 billion deal for service company EDS. That purchase was supposed to move HP closer to an equal position with industry bigwig IBM, but HP is clearly still struggling to integrate its several recent major acquisitions.

Looking at the chart, we see that after accounting for cash acquisitions, HP's cash flow in the past five years is fairly minimal in all years except 2006 and 2009. It's fairly troubling that the company's underinvestment in researching areas such as storage has caused it to overspend on purchases such as 3Par. HP investors are hoping opportunities such as networking growth and more traction in storage can help propel the company to better growth in the coming years.

Final thoughts
HP has clearly underspent on the R&D front relative to IBM, but it's largely banking on acquisitions to catch up. In my opinion, several recent acquisitions, such as the company's purchase of 3Par, show a company that's overspending to become relevant in areas such as storage, which are key to large, integrated IT outfits. Although assorted acquisitions can plug product holes, they don't offer complete solutions. In HP's case, the company will continue to need to invest in software, storage, and networking if it wants to further its vision of being an "IBM-light."

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.