Apple spending much less on innovation than others

apple spending less on innovation vs. others rect

Bernstein analyst Toni Sacconaghi says in a research note that Apple is spending comparatively less money that it’s peers in research and development. Apple is also spending less on mergers and acquisitions. This is according to a report from Barron’s.

Sacconaghi says that Apple is currently spending 7% of their revenue on R&D compared to other large companies spending over 10% of their revenue. Apple does make more money many of their peers in the tech industry. For instance, in 2019 Apple made $260.2 billion in revenue while Google made $160.7 billion in revenue. That means that if Apple spent 7% of their revenue on R&D and Google spent 11% they would have spent about the same on R&D. In reality, Google spent closer to 16% of their revenue on R&D which is both more money and a larger share of revenue than Apple spent.

Apple is spending comparatively less than other companies on R&D and in some situations they are just spending less. Apple actually used to spend even less on R&D, when Tim Cook took over in 2011 their R&D spending was 2.2% of their revenue, and Apple has been increasing that number up to the 7% they spend now.

The analyst noted here that they can’t really tell if this increase in R&D spending means that Apple will be innovating more than in previous years. He says that their spending has grown large, but more new products aren’t being released. Many would also say that Apple’s products seem to be less innovative now, but others would argue that Apple is innovating it’s just not as noticeable now as it was in the early days of the Mac and iPhone.

Apple also spends less than their peers in mergers and acquisitions, spending only $6.9 billion—2% of free cash flow—on acquisitions from 2012 through 2019. Sacconaghi writes saying that Apple probably won’t make any big acquisitions soon:

“We continue to believe that Apple making large acquisitions is unlikely.”

It is possible that what we see here is Apple trying to play it safer than other companies. They are a large company, a household name, and hold a lot of brand power, and they probably don’t want to loose this. Apple may want to be weary of large new product innovations or acquisitions because they don’t want something to go wrong. Apple may be trying to act like a more typical company and less like the “think different” innovator it used to be.

The analyst says that this playing it safe could actually hurt Apple, because they are “underinvesting in innovation.” He adds that stock buybacks, which Apple has often done, could possibly also end up hurting Apple. He draws a comparison to IBM who may have had their downfall under similar circumstances:

“While share repurchases have historically been an effective use of cash and enabled Apple to grow EPS, we worry about potential parallels with IBM, who we believe underspent on innovation and overspent on buybacks, when it should have been reinventing itself amidst slowing product and services growth as computing moved off premise,”

For now it looks like Apple will be just fine though, as the iPhone 12 is shaping up to be a very successful product cycle. But, we will have to see if Apple continues to innovate on subsequent products for customers to stay.

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Skyler