Credit: Shutterstock photoMotorola ( MOT ) is in a bind. The mobile phone maker must invest in R&D to create new smartphones that will find favor with consumers. But we expect Motorola's stock to suffer if R&D outlays continue to rise as a percentage of gross profits.
Motorola competes with Research in Motion ( RIMM ), Apple ( AAPL ), Nokia ( NOK ), and Google ( GOOG ) in the mobile phone market. The company also sells government security devices, set-top boxes, broadband modems and iDen wireless networks.
In recent quarters, Motorola has made significant efforts to bring R&D spending under control. Going forward, the company needs to maintain this discipline without stifling innovation. Our analysis follows below.
R&D spending forecast
Motorola's absolute R&D spending fell significantly in recent years. But because Motorola's margins shrank even faster, R&D spending as a percentage of gross profits has climbed nearly 17 percentage points, from around 30% in 2006 to 47% in 2009.
We expect Motorola's R&D spending to decline from 47% of gross profits last year to around 28% by the end of the Trefis forecast period. In absolute terms, R&D spending fell from $4.1 billion in 2006 to $3.2 billion in 2009. We expect this decline to continue going forward, reaching $1.6 billion by the end of our forecast period.
You can drag the trend-line in the chart below to create your own R&D spending forecast for Motorola and see how it impacts the company's estimated share value.
Motorola's shares could take a major hit if R&D expenditures slide more slowly than we expect. There could be a downside of 20% to the $8.39 Trefis price estimate for Motorola's stock if R&D spending falls to 35% by 2016 instead of the 28% that we currently forecast.
The risks of cutting R&D
Motorola's formerly troubled mobile phone division has shown distinct signs of life in recent quarters with the launch of popular, profitable smartphones like the Droid, Devour and Droid X.
These phones should help widen Motorola's profit margins on mobile phone sales, which have been shrinking in recent years. In the next interactive chart you can drag the trend-line to create your own mobile phone margin forecast for Motorola and see how it impacts the company's stock.
Going forward, Motorola will obviously need to support its research department if it hopes to compete in the smartphone market with the likes of Apple and RIM. But unchecked R&D spending could damage the stock. Expect this balancing act to define Motorola's R&D strategy going forward.
You can see the complete $8.39 Trefis Price estimate for Motorola's stock here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
