Is Apple’s Soaring R&D A Sign Of Good Things To Come?

Apple‘s (NASDAQ:AAPL) research and development spending has been trending higher, growing at a CAGR of about 25% between FY’14 and FY’17. That said, the higher R&D spending isn’t exactly translating into meaningfully higher profitability for the world’s most valuable company. Apple’s Return on Research Capital (RORC) – a measure of how much gross profit is generated for every dollar of R&D spent in the previous year – has been trending steadily lower. While Apple earned about $15 in gross profits in FY’15 for each R&D dollar invested the previous year, we expect the metric to decline to just about $8 by FY’19. We have also created an interactive dashboard analysis on how Apple’s R&D expenses are trending.

R&D Efficiency Is Trending Lower As Apple Invests In Custom Technology, Long-Term Projects

There are likely to be multiple factors driving this decline. For one, the smartphone market, from which Apple derives a bulk of its revenues and profits, has largely plateaued both in terms of units sold and feature-based innovation.  Moreover, Android-powered devices are offering a lot of similar functionality as the iPhone, causing Apple to invest in developing more advanced proprietary components in order to differentiate itself. Over the last few years, Apple is spending more to design custom silicon, while also introducing new technologies such as depth-sensing cameras, 3D touch and taptic engines, without being able to boost revenues and profits as meaningfully. Separately, Apple is also possibly making R&D investments that have a multi-year horizon in areas such as automotive technology, artificial intelligence and augmented reality. While these investments could be a drag on the bottom line in the near term, they could pay off for the company over the long run.