The 'Four Horsemen of Tech' Are Not Equal

The stocks of the "Four Horsemen of Tech" - Apple (AAPL), Google (GOOG), Research in Motion (RIMM) and Amazon (AMZN) - have been clobbered over the last two months. Do they deserve the punishment? Which way will their share prices go?

I believe the key is how they are able to grow their earnings. I think it's fair to say that these four companies have changed the way we live: how we communicate, shop, work. Each has excelled at innovating. Apple has delivered the iPhone, iPod, notebook and desktop advances. Google has revolutionized the internet. Amazon has brought shopping to the Web. RIM's Blackberries have become a must have for the business world.

However, although they all are masters at innovation, the four companies are not equal in how effectively they have used their R&D budgets to drive their operating incomes. See the table below (in millions of dollars).

click to enlarge images

Amazon has had trouble translating their R&D into operating income. The last two years, Amazon's R&D expenses exceed operating income. Google has had better success. But the clear winners are Research in Motion and Apple. Apple and RIMM have achieved phenomenal operating income growth with a very smart use of R&D budget. From 2004 through 2007, Apple's R&D increased 59%, while its operating income sky rocketed 1300%! RIMM's R&D rose 270%, while operating income climbed 2000% the same years. Certainly earnings have to do with many parts of a company -- sales, cost containment -- but Apple and RIMM appear to be extremely effective in using their R&D budgets to both innovate and accelerate earnings. Other technology companies don't do nearly as well with their R&D. See the table below of
Intel (INTC), Cisco (CSCO) and IBM (IBM) (in millions of dollars).

Last quarter, Apple spent $246 million while its operating income expanded to $2126 million. The spread between R&D and operating income is widening. If history is a good judge, I suspect these R&D costs will continue to accelerate their operating income.

Disclosure: Author has a long position in AAPL

Comments

[Speedfilm:]

The author has analyzed R&D in just about the worst way possible. R&D is a long term investment: comparing results over the short term is largely irrelevant to the effectiveness of an R&D investment. Some R&D investments may not generate income for at least 10 years, and this can vary widely. So the R&D portfolio of a company must be understood to get an idea about the expected outcome.

For the data here, it would be better to compare 2003's R&D to 2007's operating income. (or better yet, free cash flow). I did notice one thing here: Retailers typically have a very low % of R&D to income. So I would want to know why Amazon's is so high. There may be a good reason for it, but on the face it raises a flag.

R&D should give a company sustainable differentiation. Which of these companies is best able to protect its future cash flows against competitive technology?

2008 Mar 06 06:14 AM

[brewer:]

RIMM is about to get kicked to the curb. Apple now has exchange, remote wipe, and the SDK available via OS X on the Mac.

iPhone already makes blackberry look like Maxwell Smart's shoe, but now with all these business features, iPhone will seriously explode.

2008 Mar 06 01:52 PM

[seriously ?:]

appreciate the excellent data, but I believe RIMM contracted a terminal illness yesterday.

2008 Mar 07 11:29 AM