Analysts Criticize Apple Over Low R&D Spend


Apple Inc.’s research and development spending may have increased in the last fiscal year, but Toni Saccognahi, an analyst at Wall Street firm Bernstein, thinks the iPhone maker can spend more.

In a research report covered by Barron’s, the Bernstein analyst said Apple has increased R&D spending to $12.7 billion in its last fiscal year, which accounts for more than it spent between 1998 and 2011 when it was creating the iPod, iPad, and iPhone — and is growing it at a faster clip than its revenue growth. Still, he thinks it should be even higher than the $15 billion spent on R&D since Tim Cook became Chief Executive Officer seven years ago.

“While Apple’s current R&D spending is large, our benchmarking analysis suggests that Apple appears to still be underspending on R&D today, perhaps by a factor of 2x,” wrote the analyst in the research report covered by Barron’s. “Over LTM, Apple spent 5.1 percent of its revenue on R&D while reporting GMs of 3 percent. Our analysis suggests that ‘normalized’ R&D spend for a tech company of a similar gross margin profile might actually be closer to 10%, suggesting that Apple could double its R&D and be relatively inline with peers.”

Saccognhi noted that among the ten biggest tech companies in the U.S. by market cap, Apple was the largest but ranked sixth in terms of R&D spending. What’s more, the analyst said that even as Apple has increased R&D it hasn’t accelerated the pace of innovation.

“The jury is still out on whether new product and services offerings have been a ‘home run’ a la the iPod, iPad or iPhone,” wrote the analyst in the report. “The failure to produce other blockbuster offerings is perhaps most disappointing in the context of the company’s scale and Apple’s resources.”  The analyst did note that Apple has new products on the horizon that will be launched in the near or medium term that may be blockbuster hits. Still, with the iPhone accounting for greater than 60 percent of Apple’s profits, Saccognahi said Bernstein struggles with “recommending Apple as a long-term core holding.”