Over at Forbes, Martin T. Sosnoff made it pretty clear. He thinks GM (GM) is “a more viable investment” than Apple (AAPL).
Why? Well in part because he thinks Apple isn’t spending enough on research and development, fearing the company may become “the next Polaroid,” the camera/film company that lost its way as quick film processing and digital technology emerged to replace instant film.
Perhaps, Polaroid’s demise sticks in Steve Jobs’ viscera, and that’s why he sits on Apple’s boodle of $60 billion in liquidity now earning peanuts. With product momentum from smart phones and the iPad assured, Apple’s earnings approach $30 a share in calendar 2012. Its pot of cash then should exceed $100 billion, nearly a third of the present market capitalization of the company.
I have no idea what Steve Jobs’ “viscera” is like, but I doubt it has much to do with a defunct instant film company. And as for this opinion, I think Martin is missing something when he compares Apple and Intel (INTC) in terms of their R&D expenditures.
What is Apple cooking up that’s a major product prospect? The Street mumbles about a smart television set, but I dunno. What I do know is Apple’s research and development budget is a comparatively low percentage of revenues at 3 percent.
Tech houses, like Intel forever spend over 10 percent on R&D. Not that spending over 10 percent on R&D saved Polaroid or even Xerox (XRX) from lapsing into desuetude.
If Apple does lapse into “desuetude,” I have a feeling it won’t have much to do with R&D budgets. Here’s why.
First, let’s take a look at the percentage of revenue each company spends on R&D. I created a chart that shows this percentage annually on a trailing four quarters basis.
Yes, in percentage terms Martin is right. Apple spends far less on R&D than Intel does.
But let’s look at actual revenues:
Apple’s revenues are growing far more rapidly than Intel’s. As for actual R&D spending, take a look at these charts:
As Apple grows, its R&D budget is growing as well. The company is spending more than twice as much on R&D than it was four years ago, while Intel’s expenditures are relatively constant.
How much R&D is enough?
It doesn’t bother me one bit if a company isn’t spending a certain percentage of its revenues on research and development. All I care is that they spend enough.
How much is enough? Well that reminds of a quote often attributed to Abraham Lincoln who observed that your legs really only need to be long enough to reach the ground. Besides,comparing Apple with Intel is, well, apples to oranges (pun intended).
Sure Apple is a technology company, but it also runs an online content business (iTunes). Amazon (AMZN) provides content, too. How much does AMZN spend on R&D? As it turns out, nothing. The closest line item I could find was “technology and content” and that seemed to run about 5 to 6 percent of revenue over the last four years.
Apple is also a retail company. How much does a high end retailer like Williams-Sonoma (WSM) spend on R&D? As it turns out, nothing – or at least it’s not a major line item in the earnings statement. I’m sure it spends something, but it’s probably lumped in with other general and administrative expenses.
I’m not saying GM, or Intel for that matter, are better or worse than Apple. I actually own all three. They’re just different companies and a comparison that implies that Apple will lose its mojo if it doesn't spend more on R&D just doesn’t make any sense to me.
Or to put it another way, how many investors do you think decided to buy Intel in part because it spends more on R&D than a company like Apple?
Besides, with Apple’s “boodle” (as Martin puts it) of $60 billion in liquidity, the company could easily crank up research and development – and maybe it will. But what it's already spent on R&D has seemed to work out quite well so far.