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One Statistic Could Make Or Break Apple's Future

Published 06/28/2017, 02:40 AM
Updated 07/09/2023, 06:31 AM

by Chaim Siegel of Elazar Associates LLC

We’re in a race right now, a technology land grab. Technology and the way it's being used is changing quickly. The most aggressive companies will likely be the winners.

We all saw how Amazon (NASDAQ:AMZN) surprised the Street for many years with a string of losing quarters, yet the stock moved higher. Companies like Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) are constantly adapting their business model with a new main goal, spending aggressively to capture talent and develop technology.

Where is Apple (NASDAQ:AAPL) in all of this? While Apple is well loved on Wall Street, we’ll show that they may be falling behind the curve at a critical time in this technology cycle.

Let’s Get Right To It: It's All About R&D

Here is last quarter’s list of some of the most followed companies in tech:

Q1 YoY R&D Growth

We pulled out one critical number from each company. This number holds within it the future success of each company.

Facebook spent almost $2B in Research and Development (R&D) per quarter and is growing this figure the fastest among all the companies on the list.

Amazon had $4.8B in R&D expenses last quarter, which was the most out of any on the list; they even grew it as fast as Facebook’s much smaller amount.

We show “cost of goods sold” (COGS) for Netflix (NASDAQ:NFLX) because it relates to their video content spend, which competes with all these companies, so that’s the line-item that matters.

Where is Apple? Where is Microsoft (NASDAQ:MSFT)? Apple’s R&D growth is at the bottom of the list. They are in the middle of the list in total R&D spend. They are not being that aggressive.

Microsoft, same thing. Microsoft is in the middle of the pack in total spend and at the bottom of the list in growth spend.

If you're an Apple shareholder, or even just considering an Apple investment, shouldn’t this concern you?

This gives a birds-eye view into the future in this one stat, don’t you think?

Apple: Great Earnings, Great Cash Position, But Stock’s Too Cheap, Now We Know Why

Who doesn’t love the iPhone and everything it’s done for Apple and its shareholders? Who doesn’t love their almost $70B in cash and marketable securities or roughly $13 per share?

AAPL Weekly

With all that, the stock is trading at about its historic average, 15-times PE versus our numbers for next year. For such a great company, you would think you could get a higher multiple.

The issue though is its growth prospects. Revenues have not been in the double-digits since the September quarter of 2015.

We hope revenues can start to pick up because they can flow through to earnings and drive the stock.

But looking at its competitive spend, we worry that there is too much competition for the next leg in tech. Will Apple innovate into this next tech leg or will Amazon, Facebook or Google?

We worry that R&D spending growth could be that early hint regarding the answer.

Why Not Ramp Up The R&D Spend?

Spending aggressiveness is cultural. Amazon was certainly born into that spend-first culture. Maybe they even pioneered it. Tesla (NASDAQ:TSLA) is following with a similar spend-first model.

Facebook was also born into a spending buy-or-die mentality, paying big for WhatsApp, Instagram and Oculus among many other acquisitions.

More traditional companies like Apple and Microsoft have broader investor bases that own the companies for stability. These two weren’t born into this new spend-at-all-costs-for-fear-of-losing mentality. They are already positioned and may not feel the same threat to survival as the newer generation of tech companies.

Ramping up spending would mean making more mistakes, taking more risks and catching more flak from investors and the media. It could even mean missing or lowering Street earnings expectations. The corporate fear would be that investors are not set up for this new mindset.

Investors expect consistency from Apple. That consistency-mindset rather than the fear-of-being-technologically-disrupted-mindset could cause traditional companies to miss opportunities in the coming tech boom.

Conclusion

We hear about Apple building out apps, services, cars, and internet-of-things. But are they aggressive enough to win? In Q1 they were one of the least aggressive spenders on R&D. What does that mean for their future?

Disclosure: Portions of this report may have been issued in advance to subscribers or clients. All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC and their related parties harmless. Any trading strategy can lose money and any investor should understand the risks.

Latest comments

Good one
IMO concentrating purely on the quantity of spending could be rather misleading. Quality of spending is equally important if not more so. With comparatively lower spending it could be that a well established business just allocates funds in a way more efficient manner than some new kid on the block buying up everything within reach hoping something will shoot. Just sayingPost
To develop further I guess what I am thinking is that these numbers and this article don't make much sense as is. You need a much deeper analysis to make anything out of these numbers.
 , the work is endless. you are right we always need to dig further. this report just scratches the surface  but glares the core issue in techland today. who's going to win and who's not. . the cautious will not survive. the risk takers will.. . the truth is tesla, google, amazon, and facebook are incredibly data dependent. they are using tons of data to drive their business.. . when i hear about nvda's customers, I dont hear much about apple. i do hear a lot about amzn, goog, fb, baba, hyperscale. i dont hear msft and aapl. . nvda is AI, machine learning, the next age.  risk taking?  not sure. seeing the data and chasing it because its moving fast.. . nvda had a comment that each inning gets faster and if you miss an inning you miss the entire curve.. . if you cant find anything to spend on it means you're not looking in the right places. technology is about to going into a boom and some players are going to grab it and some not. tip toeing isnt going to do it. you have to be aggressive. w/ data
Great focus. Compare to Microsoft, who turned from a dinosaur into a butterfly after it dumped hardware and converted its business model into software. Apple needs to do the same to stay relevant, or it will go the way of other dinosaur tech.
agree
Apple pays a dividend, the others don't
Lucky, compare apples to apples. The man is talking about the long term outlook and you're talking about a temporary feature. Should Apple shares start to bleed, they will adjust their dividend generosity. Also, would you prefer to collect a dividend, while the competition gives its investors triple digit growth?
Great point!
Lucky thats the point Apple pays div but others investing in tech big time.
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