Sacconaghi says that the tech titan is spending only 2% of its free cash flow on R&D compared to 25% for its peers. Free cash flow is the amount of cash generated by a company after accounting for capital expenditures (like buildings and equipment). Since Apple throws off a huge amount of cash every year, even 2% of free cash flow amounts to a ton of money. Still, as a percentage of this metric, Apple is not investing as much as the competition is.
The analyst notes that Apple spends 5.1% of its revenue on R&D compared to the 10% spent by other tech firms with the same gross margin that Apple generates (38%). Sacconaghi says the numbers show that Apple would need to double its R&D spending just to match the percentage of revenue spent by its peers. Additionally, Apple is the largest revenue producer among the ten largest U.S. tech firms by market cap, but was sixth out of the ten in R&D spending.
While the actual dollar amount spent on R&D has quintupled over the last 6 and a half years, the analyst says, "The failure to produce other blockbuster offerings is perhaps most disappointing in the context of the company’s scale and Apple’s resources." Some of the increase in R&D spending will result in new products, but he does acknowledge that "Apple requires significant maintenance R&D to continue innovating its expanded product and—particularly—services lineup."