Analyst says Apple is not investing enough in innovation

Analyst says Apple is not investing enough in innovation
Bernstein analyst Toni Sacconaghi today said that even though Apple spent $12.7 billion last year on research and development (R&D), the company might not be investing enough in innovation. The amount of money that Apple spent on R&D last year was more than the amount it invested in new products from 1998 to 2011, a time period that included the introduction of the iPhone, iPad and the iPod. And yes, Apple's growth in R&D spending is faster than its revenue growth. But looking at it other ways, the company might actually be miserly in spending for the future.

Sacconaghi says that the tech titan is spending only 2% of its free cash flow on R&D compared to 25% for its peers. Free cash flow is the amount of cash generated by a company after accounting for capital expenditures (like buildings and equipment). Since Apple throws off a huge amount of cash every year, even 2% of free cash flow amounts to a ton of money. Still, as a percentage of this metric, Apple is not investing as much as the competition is.

The analyst notes that Apple spends 5.1% of its revenue on R&D compared to the 10% spent by other tech firms with the same gross margin that Apple generates (38%). Sacconaghi says the numbers show that Apple would need to double its R&D spending just to match the percentage of revenue spent by its peers. In 2017, Apple was the largest revenue producer among the ten largest U.S. tech firms by market cap, but was sixth out of the ten in R&D spending. 

While the actual dollar amount spent on R&D has quintupled over the last 6 and a half years, the analyst says, "The failure to produce other blockbuster offerings is perhaps most disappointing in the context of the company’s scale and Apple’s resources." Some of the increase in R&D spending will result in new products, but he does acknowledge that "Apple requires significant maintenance R&D to continue innovating its expanded product and—particularly—services lineup."

The next home run for Apple could be the rumored AR powered Apple Glasses. Loup Ventures analyst Gene Munster said last year that the product will be bigger than the iPhone. The glasses could launch in the 2020-2021 time frame.

You might recall that Apple was accused of losing its way and not focusing enough on innovation during 2012-2013. Since then, it has introduced the Apple Watch, AirPods, and the HomePod. Even though the Apple Watch has made Apple the largest watch maker in the world, none of those products have had the impact on global consumers that the iPod, iPhone and iPad had when each were launched.

source: Barron's
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