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As the stock market turns volatile on the fears of rising interest rates, Apple (NASDAQ:AAPL) investors have to face a new dynamic for the stock. The company faces a more difficult economic backdrop while the business needs to ramp up spending to compete in the arms race in new categories such as the metaverse and autonomous vehicles. My investment thesis remains Bearish on Apple due to the squeeze of lower revenue growth and higher costs while the stock still trades near the all-time highs at $170.
Arms Race
As mentioned in my previous research, Apple is no longer a leader in spending on capital expenditures. Alphabet (GOOG, GOOGL) and Microsoft (MSFT) far outspend Apple and Meta Platforms (FB) plans a major ramp up in spending on CapEx.
Another area where Apple is slowly falling behind is research and development spending. In total, R&D spending in just as important for future growth. In this category, Apple is spending $22 billion annually, but Alphabet is now spending $30 billion. The tech giant doesn’t even match Meta Platforms anymore with only Microsoft spending slightly less on R&D.
The delayed AR/VR device is a potential highlight of Apple under spending in areas of R&D and CapEx. This device was a big part of the investment thesis of perma Bulls for paying a rich valuation for the stock. The current estimate is that Apple won’t release the device until 2023 now after some plans had the mixed reality device shipping back in 2021.
Some may suggest Apple is spending aggressively on R&D with $22 billion in annual expenses, but the amount is a drop in the bucket when reviewed in comparison to revenues. The tech giant far underspends the other tech giants with R&D spending at only 6% of revenues while Alphabet and Microsoft are at 12% and Meta Platforms spends an impressive 20% of revenue on R&D.
The combination of R&D and CapEx spending places Apple even farther behind the competition increasingly willing to invest for the future. As a reminder, Meta Platforms just outlined plans for aggressive spending in the metaverse. The company is already losing $10 billion per year on the new technology and willing to ramp up CapEx spending to $29 billion to $34 billion. The company is spending over $10 billion above the already elevated 2020 levels of $19 billion while Apple is only spending $11 billion annually on CapEx.
Counting the annual expenses on R&D and CapEx, Apple is falling far behind the other tech giants. While Apple is talking about spending on AR/VR devices and AVs, the other companies are already aggressively spending. The tech giants are spending the following annual amounts:
- Apple – $33 billion
- Alphabet – $53.6 billion
- Meta Platforms – $40.6 billion (forecast $52+ billion)
- Microsoft – $42.9 billion
Either way, the red signs are flashing that Apple must ramp up spending to match the other tech giants. With 16 billion shares outstanding, one could easily argue Apple should be spending at levels equivalent to cut EPS by $1 per share.
Business Slowdown
Nothing proves the point regarding a slowdown in tech spending were the PC market growth numbers as published by the research of Canalys. The PC market grew 15% in 2021, but the growth nearly stalled at only 1% during Q4’21.
The PC market faced years of weakness before the sudden surge in demand during the COVID-19 lockdowns. Total PC shipments reached 341 million units in 2021, up from elevated 297 million back in 2020.
PC Shipments 2021
The massive boost in PC shipments over the two-year period would suggest demand has been pulled forward a few years now. The market is so saturated, research analyst Ishan Dutt suggests both young and old family members are well stocked now with some owners owning multiple PCs now:
Taking a long-term view, the most important developments in 2021 were the large increases in PC penetration and usage rates. PCs are now in the hands of both young students and older family members, while ownership of two or more PCs per person has become more common in developed markets.
Apple has led the market with growth, but even the tech giant saw growth for Q4’21 slow down to 9.0% from a blistering 28.3% pace for the year. The company faces the same issues as the market with normalization hitting the strong growth rates of the last year.
For this reason, analysts are only forecasting annual revenue growth in the 4% range for the next 3 fiscal years. The company would beat the PC segment with any growth in 2022.
Even after this stock dip, Apple still trades at 30x FY22 EPS targets of $5.70. If the company was to aggressively ramp spending, the stock could see EPS estimates trimmed with the tech giant needing to spend now in order to grow revenues in the future.
Takeaway
The key investor takeaway is that Apple remains far too expensive for the targeted growth rates. With the company under spending on growth areas, the market has to start questioning whether Apple can maintain a level of market dominance and successfully enter new hot growth markets. Investors should expect the tech giant to eventually announce a big ramp up in spending which will hit profits and the stock price.
