Bernstein: Steve Jobs was R&D tightwad, Tim Cook less so

According to analyst Toni Sacconaghi, Apple still underspends on innovation compared with Amazon, Google and Facebook.

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

After a period of rapid growth, Apple was spending just 2.2% of its revenues on R&D in 2011, dramatically below peers. Encouragingly, under CEO Tim Cook, Apple has been aggressively ramping its R&D spending, with R&D outstripping revenue growth by a factor of 3x since 2012, among the highest among large cap tech peers.

That said, our benchmarking analysis suggests that Apple appears to still be underspending on R&D today versus peers. R&D is about 7% of revenues vs. suggested spending of 10%+ in our benchmarking exercise. We believe it is likely (as Apple execs have suggested) that R&D will continue to grow faster than revs, potentially pressuring operating margins, all else equal.

We also examined M&A spending, which is a significant source of new technology/innovation for many tech companies, and found that Apple has deployed just 2% of its FCF towards M&A – dramatically lower than peers at ~25%. Collectively, the combination of low R&D spending and low M&A suggests that Apple may still be “underinvesting” in innovation versus its peers. We continue to believe that Apple making large acquisitions is unlikely.

Maintains Market Perform rating and $400 price target.

Cue the charts:

Under Steve Jobs: 

apple bernstein innovation underspanding

Under Tim Cook:

apple bernstein innovation underspanding

My take: R&D spending can be remarkably efficient when the CEO is in charge of product design.

15 Comments

  1. Jacob Feenstra said:
    Jobs understood the concept of relevance. Then you don’t have to spend billions on irrelevance. It’s the effectiveness of R&D that counts. It’s not the amount or the proportion that counts. Tony uses the word “underspending” against benchmark but he does not know the word “effectiveness” against benchmark. It’s not about how many shots on goal you have, but how many of those shots actually go in the goal. Jobs understood that very well. Cook has been a good student of his.

    5
    August 19, 2020
    • Bart Yee said:
      @Jacob
      Agree wholeheartedly! Case in point, Google, they spent $27B in 2019-2020 and what have they had to show for it? 2-4 models of Pixel smartphones that sell, what, ~10M total unit sales annually? Instructive to see all the products started and then killed off by Google in the Google Graveyard at killedbygoogle dot com. They have no understanding how to come up and hone great ideas, and then iterate them till they become indispensable, and importantly, add to user experience and/or bottom line.

      Even Apple, who bought Beats for their music streaming, Beats 1, now iterates it to the next level, Apple Music Radio including Apple Music 1, Apple Music Hits and Apple Music Country. Sure, there will be R&D stuff that never sees the light of day but Apple learns each time. Even their biggest mistake, the Sapphire supplier GT Advanced that cost them $578M, they turned the ex-factory into $2B data center instead.

      2
      August 19, 2020
  2. Bart Yee said:
    Toni again trying to shove Apple into some predetermined, rule of thumb, industry “peer” spending or operational metric cubbyhole for R&D, M&A, and how to run its business. If Apple did what everyone else did, it would perform pretty much how everyone else does, fairly average.

    Yet, Apple, while managing to spend less on R&D, seems to do alright when it comes to revenue generation, product and services sales, profits, and product popularity AND innovation. AAPL share price has risen “despite” all of this “dismal” spending metrics. As for Toni’s continued market perform, I’ll just say that Apple’s YTD performance has been 57.42% at yesterday’s close, compared to DJIA -2.66%, S&P500 4.92%, and Nasdaq 24.95%. Because AAPL is a part of all three indexes, those indexes would be even more worse off without AAPL in them. The market has a lot of catching up to do.

    For the future, I wouldn’t be surprised if AAPL added another 10-20% by year end, far ahead of Mr. Market.

    6
    August 19, 2020
  3. David Emery said:
    Of course, there is another way to view this graph. Pivot it and label it as “efficiency of R&D Spending”. Apple’s R&D spending is a lot more -efficient- than its peers.

    One would think someone with an MBA would understand that R&D is an -expense-, and that part of the way to make profit is to minimize expenses. Makes me wonder what school Toni went to, where they didn’t teach that.

    2
    August 19, 2020
  4. Fred Stein said:
    Toni does not listen. Jobs said, “We say no to a lot of things.” Tim Cook says, ‘not the most, we want the best.”.

    Apple does not underinvest. Apple outperforms. They get higher ROI on R&D. They get better OM on GM because of low SG&A.

    5
    August 19, 2020
    • David Emery said:
      I tried to make that same point in a comment “awaiting moderation”. The more reasonable way to look at this is to view R&D efficiency, noting that R&D is an expense.

      1
      August 19, 2020
  5. Bill Haymaker said:
    Interestingly Tony doesn’t bother to quote Steve Jobs whose philosophy underpins much of what Apple believes in.
    “Innovation has nothing to do with how many R & D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R & D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”

    He continues down his path and is seemingly critical of Apples M&A activity even though they buy a significant number of companies every year. It doesn’t require much thought to speculate that Apple is more interested in what they buy then how much.
    “Apple buys a company every two to three weeks on average, CEO Tim Cook told CNBC. In roughly the last six months alone, Cook said, Apple has bought approximately 20 to 25 companies.” May 6, 2019

    3
    August 19, 2020
  6. Fred Stein said:
    A better way to look at Apple’s innovation and acquisitions:

    They acquire IP and talent, before startups build out redundant sales, marketing, finance, HR and culture that create integration costs and risks. That’s efficient.

    Apple starts and stops or pivots projects iteratively, in stealth. That’s efficient. They learn.

    Apple acquired Intel’s 5G assets, IP plus 2,200 employees or $1B. That’s a steal.

    Apple acquired 30%+ of AAPL at an average of 1/3 of today’s price.

    1
    August 19, 2020
  7. Fred Stein said:
    More:

    Apple dominates SmartWatches and SmartEarbuds, with their supposed low R&D.

    ARM PCs ensures decades of growth in that category vs. competition.

    Apple started investing in mobile games years ago and lead in that segment growing at 12.9%

    1
    August 19, 2020
  8. Fred Stein said:
    Final.

    The only reason Apple’s R&D % seems low is because their revenue and OM are high.

    Toni has it backwards.

    1
    August 19, 2020
  9. Jerry Doyle said:
    A sizable degree, as denoted in above comments, of new, innovative and experimental ideas come from the volume of new start-ups in Apple’s purchasing of those many companies either through mergers or acquisitions. When one adds these costs, then Apple’s R&D outlay is examined in a different spotlight.

    0
    August 19, 2020
  10. Peter Kropf said:
    What about corporate politics?

    Apple has one P&L responsibility resting in the hands of their CFO. Apple is organized as a single army with long term strategic decisions being made at the top – TC for the unique purpose of winning the ‘war’. Tim Cook is in the position of Dwight Eisenhower.

    All the rest have competing divisions, each with its own P&L and its own competitive need to get the most R&D it can get. Their internal warfare is demanded by their horizontal competing structures. Pigs at the trough.

    What’s Steve Jobs’ greatest invention?

    Apple.

    0
    August 19, 2020
  11. Thomas Larkin said:
    Hmm, let me make an attempt at a few possible translations (just speculation): Despite appearances, Apple is doomed because it doesn’t pursue the strategy of continually throwing $hit at the wall hoping something sticks? He’s really concerned Apple may be doomed, and he really, really means it this time? Still shorts to be covered? More doom to come? Hoping to set up for the next swift, sharp reversal (I did manage to take advantage of the last one, to a significant extent)? Does the SEC care?

    Or should I take the tin foil hat off?

    Wait, I’ve got it, throw my hands in the air, recognize it as the same old BS and and stay stay nimble.

    0
    August 19, 2020
  12. Gregg Thurman said:
    Toni has it backwards.

    Everything said above, as true as they are, can be encapsulated in this one sentence.

    Great observation Fred

    0
    August 19, 2020
  13. Kirk DeBernardi said:
    This Toni’s “note to clients” only illustrates why he shouldn’t write notes to clients.

    0
    August 19, 2020

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