Higher R&D Spending Does Not Equal a Higher Stock Price for Tech Companies - Analyst (AAPL) (IBM)

New research out today from Bernstein analyst Toni Sacconaghi showed that, surprising, higher R&D spending for tech companies does not equate to better stock performance. In fact the opposite is true. Sacconaghi's research shows that the stocks of technology companies in the lowest third of R&D spend have outperformed companies in the highest third over 1, 3, 5 and 10 year periods since 1977, with a 5 year average outperformance differential of nearly 800 bps.

Sacconaghi said the trend appears to be unique to the tech sector. Across the S&P more broadly their analysis suggests no meaningful relationship between R&D spending and stock performance.

In trying to explain why R&D spending is a poor predictor of tech stock performance, Sacconaghi hypothesizes: 1) that R&D is a scale game, and smaller players have high R&D levels as a percent of sales to try to compete with larger players; and (2) that R&D productivity (how
distinctive and how much return a company generates from R&D) is more important that R&D intensity. Apple (NASDAQ: AAPL), or example is historically a great stock and a relatively low R&D spender and enjoys both scale and strong R&D productivity.

R&D productivity matters the analyst said. Sacconaghi said within their overage universe, Apple (NASDAQ: AAPL) and IBM (NYSE: IBM) have relatively low R&D to sales ratios (2.9% and 6.2% respectively) and their stocks have been significant long-term outperformerers. "While they both benefit from scale, we also believe that have strong R&D productivity," the analyst said.

As an example, the analyst notes that Apple and Dell both spent the same dollar amount on R&D through 2004/2005 (roughly $500 mil./year), yet Apple at the time owned its own operating system (OSX), had developed a digital music ecosystem (iTunes) and was generally considered to have superior and more innovative product design.

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