One Statistic Could Make Or Break Apple's Future
Investing.com | Jun 28, 2017 02:40AM ET
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.
h3 Let’s Get Right To It: It's All About R&D/h3Here is last quarter’s list of some of the most followed companies in tech:
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?
h3 /h3 h3 Apple: Great Earnings, Great Cash Position, But Stock’s Too Cheap, Now We Know Why/h3Who 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?
Get The News You Want
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.
h3 /h3 h3 Why Not Ramp Up The R&D Spend?/h3Spending 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?
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