R&D It's not the size that counts but what you do with it

Innovation is the key to business. It's an old technology saying if you can't predict the future then you have to invent it! The only constant is change and we need to change just to keep up. I always thought research and development would be the best way to measure innovation. Yet looking at research and development spend as a % of sales Apple the most innovative company over the past ten years spends very little (see below). Apple's $6 billion R&D pales in comparison to Microsoft's $11.4 billion. Facebook spends just under half Apple's but as % of sales are reinvesting heavily in messaging and virtual reality applications.

Research and Development spend as % of sales

Source: Bloomberg

Surprisingly Apple does not even make the top 20 list on an absolute basis, click
below to enlarge. I never would have though of Volkswagen being the most innovative company.

Source: http://www.strategyand.pwc.com/global/home/what-we-think/innovation1000/top-20-rd-spenders-2014

Thankfully Bernstein released a report last year asking "Do high R&D spenders in tech generate stock outperformance". They found that companies with the lowest spending on R&D tended to out perform the best. Companies that spent up to 17% of sales on R&D outperformed higher spending companies over 1,3,5-10 year periods. Their research showed that stocks in the lowest third of spend have outperformed since 1977 with a 5 year average out performance of nearly 8%. It's a little counter intuitive but large R&D spend does not equate to better stock performance. It's all about scale and productivity. Productivity is harder to measure so we can only judge based on products. Luckily we can look around us to get a better feel on product innovation. How many people do you see with Microsoft phones and tablets compared to Apple products. Don't worry about R&D spend the customer votes on innovation with his wallet.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Apple and Google stock. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.