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Tech companies want to be perceived as innovators. But what’s the best indication of that status? To shareholders, it’s often the company’s research and development budget: The bigger the budget, the more innovative and successful the company — or so the conventional wisdom goes.

But a new report from Bernstein Research analyst Toni Sacconaghi suggests the opposite.

Sacconaghi looked back at historical R&D spending figures as a percentage of sales for publicly traded tech companies with market caps of $2 billion or more going back to 1977, and broke them into three groups based on how much they spent on R&D as a percentage of revenue: Big spenders, medium spenders and low spenders.

The result: Companies that spent the most on R&D tended to have shares that underperformed the markets over time, and also relative to those companies that spent less.

Sacconaghi applied the same analysis to 68 large-cap tech companies over five years ending in June of 2011. In that batch of companies, those that spent the most on R&D relative to sales saw an average decline of 26 percent in their share prices at the five-year mark. Those that spent the least did better, seeing an average improvement in their share prices of 17 percent after five years.

As you can see from the screen-grabbed table from Sacconaghi’s report below (click to embiggen), there are some familiar names in surprising places on the list. Commodity technology suppliers like chipmakers SanDisk and Micron Technology spent less than nine percent of sales on R&D over five years but saw their shares skyrocket almost 300 percent. The result was similar with hard drive manufacturers Western Digital and Seagate. Apple was on the list, too, spending only 2.4 percent of revenue on R&D at a time when its shares outperformed others on the list by about 45 percent.

As for companies that spent more of their resources on R&D, the results were consistent across big- and medium-spenders: Their shares, on average, tended to lag. Among them were networking company Juniper Networks, software concern VMware and chipmaker Advanced Micro Devices, all of which underperformed by an average of 26 percent. Similarly, those in the middle cohort, including software giant Oracle and enterprise storage players EMC and NetApp, fell by an average of 15 percent.

There were notable exceptions in all three lists: BlackBerry shares performed the worst among the entire group, falling 113 percent and dragging down the average performance of the low-spending group. There were also high performers among the big- and medium-spenders, among them Yahoo, Google, Adobe and

So what’s it all mean? For one thing, R&D spending is a bad predictor of future stock performance. R&D, Sacconaghi hypothesizes, is a “scale game,” meaning that smaller players have to spend more of their resources to compete with larger players. But more important than the spending levels are the results of the research. Any company can spend big on research that comes to naught, and some are simply better at it than others. Apple is the prime example of a company that spends less on R&D — historically about two percent of sales — but which has tended to enjoy a big bang for its research buck.

Finally, Sacconaghi found that what correlations there are between R&D spending and stock performance are unique to the tech sector. He found, he writes, “no meaningful relationship between R&D spending and stock performance” across the universe of companies traded on the S&P 500 between 1977 and 2014.

Chris van Loben Sels
Chris van Loben Sels

Hmmm, the details of this might not stand up. At first glance, Accenture is helping the "low R&D group" a lot, but no surprise there -- they are not a product company. They should be excluded, as there is no R&D-is-good hypothesis that would expect a pure services company to have comparable R&D spending to a chipmaker. (Or, I suppose the analysis should widen to include other exchanges so all the other global SIs, like CapGemini, TCS, etc, could be included.) Also, the break between the low and medium group looks off by one. Thats the problem with this styles of analysis, half a dozen little changes and the findings start to erode . . . 

But more importantly, it's attacking a straw man. R&D spending includes all product development expenses: Meaningless improvements and bug fixes in old products are lumped in with actual innovation-driving development. As we all know from Innovator's Dilemma, large dying tech companies continue spending on improving current products -- keeping R&D costs high -- but then miss the boat on the new market.  So a dinosaur starting to die and a dog about to reveal new tricks could look similar from a gross R&D standpoint.

It does serve as a good reminder that there are two strategies -- product differentiation and cost leadership. It shows that while "commodity" is frowned on by the chic, it's not by those interested in creating value.

It would be interesting to try this again, also including M&A spending as the other way of capturing innovation.


 What a flawed analysis...

1. Company that is in problems (i.e., its sales are low) will have issues with its stock market value

2. For the same amount of R&D money, lower sales make a big increase in relative spending

thus it is obvious that those who spend "a lot" on R&D will usually have issues with their stock price projections

bonus points:

3. some techs have to spend a lot to remain on top 

4. the timespan of analysis was 2006-2011. i.e., before the big crisis and after it, before world economy recovered from it. clearly, no continuous model (such as the assumption that investing in R&D brings benefit for company) can cover such an event and its immediate consequences.


What exactly counts as R&D? just a tax writeoff? I've noticed that Dell spends BILLIONS on R&D though it seems for most of the life of Dell, you'd be hard pressed to figure how and why they'd have to spend billions to assemble off the shelf components?


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