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Apple has the most growth fuel in hand

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NEW YORK (Reuters Breakingviews) - Apple Chief Executive Tim Cook is keeping things tight. The $2.5 trillion iPhone maker spends a much smaller proportion of its revenue on research and development than its Big Tech peers, and less on acquisitions too. That keeps organic growth efficient. Investment is edging up, but the capacity to do more of it is one reason Apple, despite its huge market value, looks relatively cheap.

Apple allocated nearly $19 billion to R&D for the fiscal year ending September 2020, roughly 7% of its sales. Microsoft, meanwhile, budgeted approximately the same dollar amount for the year ending June 2021 but it represented a bigger slice of revenue, some 12%. Amazon.com, Jeff Bezos’s e-commerce giant, and Google parent Alphabet put 11% and 15%, respectively, of their revenue towards R&D last year.

Cook has also avoided splurging on acquisitions. In the past five years, Apple spent just $1.3 billion on acquisitions, according to Refinitiv records. That’s a fraction of the deals done at Microsoft, where they totaled close to $33 billion, and at Amazon, with over $24 billion. Among the fast-growing technology groups dubbed the FAANG stocks, only Netflix, which tends to eschew mergers, spent less than Apple.

A company that has sold around $140 billion worth of essentially one product, the iPhone, in each of the last two fiscal years can make what looks like a little product development go a long way. And Cook is milking what the tech folks like to call the ecosystem more and more. One of its fastest-growing and most lucrative businesses is services, where analysts reckon revenue increased 21% year-on-year to almost $18 billion in the recent quarter.

On the other hand, the services business is also under scrutiny from regulators and a legal attack from competitor Epic Games. Apple’s R&D spend has ticked up in recent years, and the company might need to invest more still to overcome such headwinds. But compared to its biggest peers, who consistently spend more for each dollar of sales, it has room to do so.

Meanwhile, Apple's stock trades at around 26 times the coming year's estimated earnings, according to Refinitiv. That compares to Microsoft at 33 times earnings and Amazon at more than 50 times. Investors expect less of Apple, but it has the most growth fuel in hand.

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CONTEXT NEWS

- Apple is due on Oct. 28 to report earnings for the three months ending September, the company's fiscal fourth quarter. Analysts are expecting revenue to increase 31% year-over-year to $85 billion in the period, according to data from Refinitiv. Net income is forecast to rise 59% to $20 billion.

(Editing by Richard Beales and Amanda Gomez)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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