Few fields move as rapidly as technology. Businesses creating outsized profits and returns for shareholders quickly get bull's-eyes on their backs, targeted by other companies looking to disrupt their products by selling cheaper alternatives that still prove "good enough." Even if a company continues to dominate its particular field, other changes in technology can shift spending away from its products. Think about how Microsoft still dominates PCs, but it's pressured by sales that are shifting to mobile devices such as smartphones and tablets.

With that in mind, today we're looking at how SanDisk (Nasdaq: SNDK) innovates. Technology companies can innovate either through acquisitions or by spending more on research and development. We'll compare SanDisk'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, SanDisk has spent an average of 10% of revenues on R&D. Here's how that figure stacks up next to some of its rivals.

Company

2006

2007

2008

2009

2010

LTM

SanDisk

9.4%

10.7%

12.8%

10.8%

8.8%

8.8%

Micron (Nasdaq: MU)

12.4%

14.2%

11.6%

13.5%

7.4%

8.5%

Seagate (Nasdaq: STX)

8.7%

8.0%

8.1%

9.5%

7.7%

8.0%

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

SanDisk has kept R&D at relatively consistent levels between 9% and 13% over the past five years. At times, that figure was less than flash-memory rival Micron put up, but the company also didn't drastically cut back R&D during the recession as several of its competitors did. SanDisk has important patents on flash technology that gives it an edge over its rivals -- essentially, it can collect an extra 10% of revenue purely on IP -- but the company should also see increasing competition in the coming years. Not only does it compete with Micron, but Intel (Nasdaq: INTC) and Samsung are also heavily engaged in the space. That creates a situation where SanDisk, in spite of its strong IP, has to compete against several competitors with larger scale and resources.

Acquisitions
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 hard drives and PCs while it remains focused on acquiring additional services and software expertise that have transformed its business model.

However, on the opposite end of the spectrum, Hewlett-Packard is often criticized for underinvesting in research and development to the point that it has to overpay on acquisitions to catch up with 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. With that in mind, let's take a look at SanDisk's free cash flow over the past five years against cash spent on acquisitions.

G

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

Historically, SanDisk hasn't been an especially acquisitive company. However, the changing face of flash storage has caused the company to get more aggressive. Recently, SanDisk made a grab at Pliant Technology, a specialty solid state storage drive (SSD) company that competes in the enterprise segment against other companies such as Fusion-io (NYSE: FIO), SMART Modular (Nasdaq: SMOD), and STEC (Nasdaq: STEC).

SanDisk's purchase of Pliant is an aggressive move into the enterprise SSD market. That presents opportunity for SanDisk, but there's plenty of innovation in the space. With the deal, SanDisk will be able to combine its more commoditized technology with Pliant's advanced storage controllers. On paper, such a deal should work. However, in reality, a push from the consumer to the enterprise segment faces significant hurdles for SanDisk in the coming years. With the long sales cycles present in enterprise IT, this deal could take some time to pan out.

Final thoughts
SanDisk has a tempting P/E ratio, is in a growing market of the IT sector -- flash memory -- and also is making strategic buys to enter new growth markets. Taken together, the company looks well positioned in the coming years. However, like all semiconductor companies, it's prone to heavy cyclicality. If the market turns on memory in coming years, lower-cost producers such as Samsung will put a hurt on SanDisk.

All factors considered, I like SanDisk at these prices, but investors should stay aware of the risks facing the company. To get up-to-date SanDisk news and analysis, add the company to your watchlist today. My Watchlist can keep you updated on happenings in the semiconductor industry that would negatively affect SanDisk. Best of all, My Watchlist is free!

Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Microsoft, IBM, and Intel and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call positions in Microsoft and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.