Cowan: Apple is spending $1-2 billion a year on moonshots

Can't innovate anymore? Analyst Krish Sankar pushes back against the pushback of skeptical investors.

From a note to clients that landed on my desktop Tuesday:

We initiated coverage on AAPL recently with an Outperform rating and $220 PT. Most of the pushback we have received (so far) on the iPhone is around replacement demand assumptions, 5G modem strategy, and emerging market traction. In Services, pushback is on AAPL's ability to expand margins, and the company's R&D spend vs product innovations. (emphasis mine)

Picking up on that last one:

PUSHBACK: Given Apple's annual R&D spending of over $15B, the company's hardware product refresh cycles are showing more incrementalism than breakthrough innovation.

RESPONSE: Our view is that over the course of Apple's history, successful break through innovations rarely occurred as an isolated event (e.g. Newton) but instead were disruptive creations within an emerging or established market. We would surmise that the majority of R&D spend is on software related products today and this in itself is a critical endeavor for innovation as well as maintenance. Given the mature state of the smartphone, tablet, and PC markets we would think it is reasonable to expect Apple's future innovations will come from other nascent markets. As a result, we estimate $1-2B in annual R&D is for future moonshot type opportunities that do not generate revenues yet.

Sankar is just spitballing, but his point is well taken. Future moonshots could be hidden in Apple's existing businesses—in, for example, AirPods...

We also note that the strong traction the Watch and AirPods have been exhibiting could be an early sign of more to come in the wearables market. We estimate wearables generated revenues of $10.3B in FY18. That business did not exist prior to 2015 and is anticipated to reach over half the size of the Mac business by the end of FY19.

My take: Apple, like Pixar, is a hit-making machine.

See also: Cowan re-initiates Apple coverage with a $220 price target

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