As Apple (AAPL) shares stagnate, investors are clamoring for any number of things: an iWatch, a television set, more cash back to shareholders. However, after taking a look at the company's research and development (R&D) spending, shareholders may want to take a step back and wait.
In an upgrade yesterday from Pacific Crest Securities analyst Andy Hargreaves, he noted that the market does not see Apple's entry into new markets at anything more than "near zero." Yet, it could be much more, especially if Apple is able to turn industries on its head like it has done in the past.
"Of the potential new categories, we see the highest likelihood for a near-term launch of an iWatch and see the most profit potential in a virtual MVPD (multi-channel video programming distributor) service," Hargreaves wrote in the note. The iWatch is seen by many on the Street as most likely, given that smartwatches and wearable technology are now becoming a new product category, with Samsung and its Galaxy Gear offerings, and Google announcing that it is launching an Android SDK (software development kit) for wearable technology. Various analysts have estimated the iWatch could cost around $299, and generate as much as $17.5 billion in revenue for Apple, as the wearable market continues to grow.
Apple has an enormous base of customers, with Hargreaves noting more than 300 million people own iOS devices, and more than 600 million have an iTunes account.
Apple has boosted its R&D spending considerably over the past few years, going from under $2 billion a year in fiscal 2010 when the iPad was launched, to over $5 billion in fiscal 2014. As Hargreaves writes in his note, "It can't all be iWatch, can it?"
Photo courtesy of Shutterstock
Photo courtesy of Shutterstock
Many expect that Apple's increase in R&D spending will simply lead to new products, and this may be true, but Apple will do so on its own time, and not fall to the whims of the market. As Hargreaves notes, "...Apple is likely to choose its opportunities and timing extraordinarily carefully and release new products or services only when it feels it has the best chance to succeed, which does not mean it is not innovative, just that it is not dumb."
Despite the increase in R&D spending over the past couple of years, Apple shares have remained stagnant since hitting $700 per share in Sept. 2012, missing out on much of the run in stocks since then. As Morgan Stanley analyst Katy Huberty said in a note talking about Apple's R&D spending, institutional investors just don't own Apple like they do other tech companies. "We view low institutional ownership relative to other large cap mobile technology stocks as underestimating Apple's ability to participate in new categories like wearables and services," Huberty penned in the note.
Apple using its cash on R&D spending is a far better use of its time (and money) than giving back a few extra billion to shareholders in the form of a dividend and buyback. Apple has around $130 billion in net cash (the company did a $17 billion bond offering last year), so clearly the company has more cash than it needs with which to operate the business. However, the focus should be, no matter how loud the cries are, on innovating. Going up against competitors such as Google and Microsoft is important as Apple seeks to stay relevant in an ever-changing technology world.
In a recent Wall Street Journal article, CEO Tim Cook said any "reasonable" person would consider what Apple is working on to be new products and services. Cook has already hinted Apple will go after the mobile payments market. "The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID," Cook said on Apple's fiscal first-quarter earnings call.
We've already seen a hint of what's to come from Apple, with CarPlay. Released in the iOS 7.1 upgrade, CarPlay allows iPhone users to control their entire in-car entertainment experience, all with the help of Siri. Once the iPhone is connected to the car, Siri can access contacts, make calls and listen to voicemails. There's also an eye-free experience, which allows you to respond to incoming texts using voice commands. It even reads your texts for you.
It's likely that CarPlay is the first of many initiatives we see from Apple this year, as it starts to aggressively move into new product categories.