Apple’s (NASDAQ:AAPL) stock is sensitive to R&D as % of Gross Profit. Apple is recognized globally for its uniquely designed devices (iPhone, iPod Touch, Apple TV, iPad) and such devices have led to rising R&D costs for Apple. R&D expenses increased from around $0.6 billion in 2005 to $1.4 billion in 2009. Such increases are putting the pressure on Apple competitors such as Research in Motion (NASDAQ:RIMM), Motorola (NYSE:MOT), Nokia (NYSE:NOK), and Google (NASDAQ:GOOG) to keep up.
However, Apple’s R&D costs as a percent of gross profit have declined as a result of the Apple’s rapidly increasing revenues and gross profits. We currently have a Trefis price estimate of $337 for Apple’s stock, about 35% above the current market price of $250. Below we highlight expectations for Apple’s R&D costs in the future.
In the past, Apple’s R&D % of Gross Profit decreased from 12% in 2005 to 7.3% in 2009 despite R&D expenses rising in absolute dollars. The average Trefis member forecasts for R&D % of Gross Profit indicate an increase from 7.7% in 2010 to 8.7% by 2016, compared to the baseline Trefis estimate of an increase from 7.5% in 2010 to 8.7% by the end of the Trefis forecast period. The member estimates imply a small downside to the Trefis price estimate for Apple’s stock.
We expect R&D cost as % of Gross Profit to increase at a moderate rate led by incremental R&D associated with existing product lines, such as Macintosh, iPod, iPhone, iPad, Apple TV and software development. In addition, the recent signal reception issue with iPhone 4 is likely to make Apple more cautious and diligent in its R&D efforts in the future.
Disagree? You can drag the forecast trend-line above to express your own view, and see the sensitivity of Apple’s stock to R&D % of Gross Profit.
