The Apple Conundrum: Analyzing Explosive R&D Spending The Apple Conundrum: Analyzing Explosive R&D Spending

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By Ronald Tech

Apple (NASDAQ: AAPL) stock saw a 47% rise in 2023, but the beginning of 2024 has been less forgiving, marking a 4% downturn. Reasoning behind this slide lies in concerns over slowing iPhone sales and a struggling market in China, where the conglomerate garners a fifth of its total revenue.

Simmering underneath the surface, however, is a bubbling pot of innovation in Cupertino, California, as Apple allocated 7.8% of its total fiscal intake toward research and development (R&D) expenses, equating to nearly $30 billion – this is the highest percentage of revenue dispensed in the past two decades, reminiscent of the periods when the tech giant was proliferating its iPod and music division while spearheading the development of its inaugural iPhone.

AAPL R&D to Revenue (TTM) Chart

AAPL R&D to Revenue (TTM) data by YCharts

While Apple’s R&D expenditure has experienced a steady ascent over the past decade, the absence of a groundbreaking product since the launch of the Apple Watch in 2015 engenders speculation about the company’s next move in terms of product innovation.

Although the direction of Apple’s cash flow may not overtly suggest a plethora of product innovation, it could potentially wield a substantial impact on returns to investors.

New Defensive Measures in Place

During the company’s fiscal fourth-quarter earnings call, CEO Tim Cook shed light on the subject of escalated R&D investment, stating:

It’s … some things I can’t talk about. It’s Vision Pro. It’s [artificial intelligence] and [machine learning]. It’s the silicon investment that we’re making, the transition with the Mac and other silicon.

The “silicon” he refers to alludes to the shift from Intel processors to Apple’s proprietary chips for Mac and other products.

For many years, Apple has channeled investments into artificial intelligence (AI) and machine learning, particularly exemplified through the Siri voice assistant. Cook’s insinuations of further developments suggest a potential realm of possibilities in the pipeline for Apple’s product roadmap.

The company’s exponential growth serves as a double-edged sword for situating a single device that significantly shifts the stock. During the iPhone’s debut in 2007, Apple was a mere fraction of its present magnitude. The days of a solitary ground-breaking device altering the trajectory and propelling the stock to new heights are presently an artifact of the past.

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However, the aspects articulated by Cook don’t advance just product innovation. They hold the potential to further strengthen the competitive perimeter and construct a more lucrative business. Warren Buffet’s decision to retain a substantial stake in Apple stock resonates with this notion, signifying a compelling argument for investors to contemplate holding shares as well.

The Value of Apple’s Investments

Even without groundbreaking product releases, Apple profits from a robust profit margin, which is currently veering towards record highs once again. This surge explains the stock’s remarkable 47% ascent in the face of diminishing sales throughout 2023.

AAPL Profit Margin Chart

AAPL Profit Margin data by YCharts

The amplification in profit margins can be attributed to the company’s amplified R&D spending. Cook affirmed that some of these augmentations are channeled into AI, a technology that underpins many iPhone features including Siri, image searches, Face ID, and the neural engine enhancing the iPhone’s camera capabilities. These amenities bolster consumer satisfaction and expenditure on services, yielding double the margin of hardware products.

Services, encompassing revenue from apps and subscriptions, is Apple’s fastest growing segment, expanding by 9% annually in fiscal 2023. Management advocates prospective advancement for services over the long haul.

“Our installed base of over 2 billion active devices continues to grow at a steady pace and establishes a sturdy foundation for the future expansion of the ecosystem,” remarked CFO Luca Maestri during the most recent earnings call.

Given that services merely constitutes 22% of Apple’s total sales and is expanding at a faster rate than other sales categories, its profit margins and financial gains should continue to scale upward. Management’s focus on enriching the epicenter of Apple’s competitive advantage, namely its brand and user experience, foreshadows burgeoning profits, potential dividend increases, and a stock luring newer highs for the years to come.