Wednesday, August 9, 2017

Apple’s Expensive Game Of Catch-Up

iPhone maker’s R&D bill has grown substantially but still lags big tech peers.


By Dan Gallagher
The Wall Street Journal
August 9, 2017

Apple Inc.’s AAPL 0.80% new 10th Anniversary iPhone is still sight unseen, yet a glance at the company’s latest quarterly results also raises the question of what else may be coming.

Apple’s spending on research and development totaled $2.9 billion for the third fiscal quarter ended July 1, rising 15% year-over-year against a revenue gain of just 7% for the same period. That brought Apple’s R&D spending to $11.2 billion for the trailing 12 months, which is about 5% of the company’s revenue for the period. Apple hasn’t expended a greater portion of its revenue on R&D on an annual basis since 2004—three years before the first iPhone launched.

That suggests other big things on the horizon, though what exactly is anyone’s guess. Apple only claims “an increase in headcount-related expenses to support expanded R&D activities” in its quarterly filing. The company is widely reported to be working on projects related to self-driving cars, health-care monitoring and augmented reality, to name just a few.

Apple, of course, is always loath to discuss any products it has in the works. But the company’s pipeline is a salient question for investors who may rightfully be wondering what to do with the stock once this year’s new iPhones see the light of day. Apple’s market value has surged 35% this year to $820 billion—adding $45 billion since last week’s earnings report, which all but confirmed that some new iPhones will indeed launch this quarter. And it is hard to forget that the stock has seen significant downturns twice in the past five years following big iPhone launches.

It is also worth noting that Apple is competing with other deep pockets willing to dig even deeper. The company’s R&D spending over the past 12 months trails that of Microsoft , Amazon.com and Google-parent Alphabet Inc . As a percentage of revenue, Apple’s R&D expenditures rank the lowest among big tech companies save for HP Inc. Of course, spending gobs of money now is never a guarantee of future success, but Apple has a distinct need to make its billions count.


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