Do It Yourself Stock Investor

Saturday Night RORC: Apple, Inc.

February 04, 2017

Apple, Inc. (NASDAQ: AAPL) recently posted a total revenue of $78.4B for Q1 2017. Tim Cook credited the record sales to strong holiday consumer activity. The largest section to receive Y/Y gains was their "Services." This includes popular app store purchases, Apple Pay and downloads connected with Apple Music.

FinViz chart of Apple, Inc stock

In contrast, the Return on Research Capital shows a downward trend for Apple. Perhaps there is a bigger product release still in the works due to disproportionate increase in the R&D expenditure.

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However, it isn't the popular iPhone or Mac Book that I consider driving consumer loyalty; not in and of themselves anyways. It is the IP/software design that forces exclusivity. For example, a music collection in iTunes does not conventionally transfer to an Android phone. It works natively with iPhone only. There are some developers that have created work-around software, "If you've been a long time user of an iPod, iPhone or iPad there's a good chance that the majority of your digital music collection is tied up inside iTunes... While there is no iTunes for Android, there are actually a few different ways for you to get your groove on." - Android Central. The customer feedback shows that these work-arounds tend to not transfer the whole music collection.

Due to the exclusivity of said design, the Apple consumer grows dependent on the brand and is deterred from crossing over. Another product of strong exclusivity is the new AirPods. These are the latest wireless earbuds (listening devices) and allow for some crossover use with android devices except, "However, you may lose some control functionality (like Siri) on non-Apple devices." This is a significant reduction in that voice commands, dictation apps, and hands-free features of the AirPod can't be accessed. That's possibly the biggest draw and distinction of the AirPod given a handicap if paired with non-Apple devices.

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A third and possibly most compelling exclusive feature owned by Apple is the artists and albums signed to Apple Music only contracts. Chance the Rapper's Coloring Book is only available on Apple Music. Some contracts are only set up for limited windows of time, such as with the initial two week launch of a music video or new single.

Return on Research Capital

The Return on Research Capital (RORC) metric looks at the R&D spending for a company and makes a correlation with the revenue for the following year. The following chart shows the RORC for Apple, Inc. over a range of three years, 2014-2016.

Return on Research Capital for Apple

For every dollar of R&D spent by Apple, Inc. in 2013 they made $40.85 in revenue for 2014. The next year the company returned slightly less at $38.69 per R&D dollar. Finally, although the R&D expenditure increased by over $2b to $8b this did not result in an increase to revenue in 2016. On the contrary, the RORC dropped to $26.73. Did the company miss allocate their cash or perhaps there is a new product that is taking longer to develop and is just around the corner? I suspect it is something that pushes for more exclusivity.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.