Kudos To The R&D Guys At Apple

Apr. 25, 2012 2:11 AM ETApple Inc. (AAPL)CSCO, MSFT, ORCL9 Comments
Stephen Rosenman profile picture
Stephen Rosenman

How do you judge whether a company has a successful R&D program? Number of patents? Increasing market share? Inventing exciting products?

None of the above. A great R&D team creates products that drive profits for years to come. Take Apple (NASDAQ:AAPL), perhaps the most innovative company on the planet. From a shoe-string R&D budget came the iPod, iPhone, and iPad. Despite spending far less than Cisco (CSCO), Microsoft (MSFT), or Oracle (ORCL), Apple has consistently delivered greater yearly revenue and earnings growth. Apple gets more for less.

(Data courtesy of Morningstar.com)

Today's bench work, future profits.

Inventing great products takes time. Money spent in the lab doesn't show up in the bottom line right away, maybe not for many years, maybe never. Investing in R&D isn't for those who seek instant gratification.

That's why I've set up a graph comparing Apple's operating income to its lagging 2- and 3-year R&D expenses.

Apple has been getting a big bang for its R&D bucks. Moreover, those R&D dollars are becoming more productive. A dollar spent in the lab in 2008 and 2009 is associated with 2011 operating income of $25 and $31. A dollar spent in 2003 and 2004 is associated with 2006 operating income of $5.

Over the last 6 months, Apple generated $40 for every $1 spent in R&D 2 years ago, $52 for every $1 spent 3 years ago. Who said Apple's years of innovation are over? Apple has spent $1.6 billion in R&D during the last 2 quarters, not far from its 2011 total year budget.

(Note: 2012 is Q1-2, 2006-2011 full years.)

Not everybody leverages their R&D.

Compare Apple to Microsoft. Microsoft has struggled to leverage its R&D: Over the last 8 years, a buck spent in R&D translates into $3 in operating income two years later. Microsoft has been stuck in

This article was written by

Stephen Rosenman profile picture
Stephen Rosenman enjoys analyzing the financial health of companies and pointing out areas the market is either not recognizing or ignoring. A long time investor, I put my money where my mouth is. That's why I'm passionate about my positions. I trumpet companies I believe in and back my articles up with data and graphs. Every now and then, I'll write something a little goofy to lighten it up...

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