Apple: Quo Vadis?

Every day we can read a lot of commends and articles about Apple (AAPL). In the end there are two groups: one group thinks the share price is too low and the other group thinks the low price reflects the performance of Apple.

People make calculations to proof the current stock price is too low. We all would love to have a higher price. But the stock value dropped heavy over the last months. Do we have now the bottom or can we see deeper prices? The followers of the second group argue that Apple makes profit with just two product groups.  They make comprehensive calculations to verify the margins will decrease, the profit will decrease and in general Apple crossed the summit. I have some difficulties to understand their argumentation. In the end Apple did have a great year. Yes, the revenue increase in 2012 was “only” 45% compare with 66% a year before and the profit increased “only” by 61% instead of 85%. After all Apple has another 41 billion dollars in the bank accounts. All together 137 billion dollars in cash and this is the point I would like to talk about.

Products have always life cycles. First thing you learn at school about Marketing. While one product is at the summit the next new product is in the starting position to guarantee future growth. The secret for success of a company are good people with ideas and a good R&D department. We all know Apple does have always good ideas. They proofed it more than once. Apple was and is always good for discontinuously innovations. Why should that change? Even if the second group is right and the margins of Apple’s products will decrease why should Apple not be able to have another innovation in the pipeline? They certainly have the people to do it. Do they spend the necessary money for R&D as well? What do they do with all the money?

I could read on Seeking Alpha a few weeks ago Apple invested 40 billion Dollars in State Bonds. This big amount of money for a low interest? I am sure the rates are lower than the inflation rate and will in the end reduce the value of the investment.   The central question for Apple is: What do I do with all the money? Investing in State Bonds cannot be the answer.

We cannot hear anything regarding purchase of other companies. We cannot hear anything regarding new products a few year down the road like we can hear from Google. About Google we can hear they have Google Glass or cars without a driver in the pipeline beside other projects. What do we hear about Apple? Nothing.  Nothing more than rumors from third parties.  Maybe Apple just does not like to talk about new things and would love to surprise the market but invest heavily in R&D.

Let us compare the R&D expenses of Apple with other companies.

The first chart shows the absolute R&D expenses.

Data source: YChart.com

 

As we can see on the chart Apple increased R&D over the last 4 years. But compare with Google they do not spend very much. Comparing with Amazon shows an even more interesting picture. Both started with 1 Billion dollar in 2008 but Amazon left Apple in 2011 and 2012 behind.

Comparing R&D with gross profit we get an even more interesting picture 

It looks like Apple spends relative every year less and less for R&D while other companies increase their spending. 

Like we discussed at the beginning of this article: it is important to invest in R&D to ensure future growth. Apple does and increased over the last 4 years. But Apple can certainly spend more money. A lack of ideas cannot be the reason why they do not keep a rate of 8.5% like in 2008. By keeping 8.5% they might not have disasters like they did have with their own Map service.

 

As a shareholder of Apple I would like to see Apple increase the business and ensure the success of the company in future as well by having more successful products. Apple: Spend, invest your money and the share price will go up again. Just having a big bank account is not the aim of the game. Apple, Talk to us.

But as always: just my 5 cents….