Big Tech's big R&D bill

Tech companies like Microsoft, Amazon and Apple have generated insane returns for investors in the last 25 years.

However, the technology sector (and various industries within it, like Software services, internet marketplaces) is also intensely competitive. Both public and private companies (funded by VC dollars) are in constant battle for customer attention and market share.

Ever present competition and birth of new technologies leads to companies spending a lot of money constantly innovating, researching & developing new products. This spend is called Research & Development (R&D) expense.

In this post, we look at how much money Big Tech companies spend on R&D. Specifically we’ll look at 3 things:

1. R&D spend by the biggest companies in Nasdaq (incl. Big Tech)

2. Trends in R&D spend by Big Tech companies over the last 10 years

3. Comparisons into R&D spend by individual companies

1) R&D Spend by the biggest companies in Nasdaq

Looking at the chart above, we can see that the 5 Big Tech companies - Amazon, Alphabet (Google), Meta (Facebook), Apple and Microsoft are big spenders on R&D.

Collectively, these 5 companies, spent $229.1 Billion on R&D in the 12 months ending March 31, 2024!

Thats significantly higher than the rest of the 5 companies combined - Nvidia, Broadcom, ASML, Tesla and Costco - collectively, only spent $25.7 Billion on R&D (i.e. almost 1/10th of the Top 5)

In fact Costco doesn’t even report any R&D expense in their SEC filings. Given companies get Tax credit from the IRS for R&D spend, its likely that Costco’s spend on R&D is too small to be meaningful for the company.

Its important to note that companies have to follow regulatory guidelines in order to classify expenses under R&D. They can’t just classify any spend as R&D.

2) Trends in R&D Spend by Big Tech in last 10 years

As we can see from the chart below, Big Tech has been ramping up R&D spend aggressively over the last 10 years - only slowing down in the last 12 months.

From 2015 to 2023, the collective R&D spend by Amazon, Alphabet, Microsoft, Apple and Meta, grew at an annualized rate of 22%, reaching $213.7 Billion (For 12 months ending Q1-23).

However, since then, R&D spend growth slowed down, reaching $229.7 Billion (For 12 months ending Q1-24). This was a growth of only 7% YoY. I don’t consider this surprising, as 2023 was the “Year of efficiency” for Big Tech, where most of these companies did mass layoffs and vowed to get more efficient. The yearly breakdown of data is provided below:

3) Comparisons across individual Big Tech companies

Across the 5 different Big Tech companies, Amazon spends the most of R&D - $85.6 Billion in the last 12 months, comfortably beating Alphabet, which is the 2nd highest spender, at $45.9 Billion.

Meta punches above its weight - spending 34% of its gross profit dollars on R&D, significantly higher than its peers shown in the chart. This amounted to $39.1 Billion, comfortably beating Microsoft and Apple.

Apple and Microsoft only spend about 17% of its gross profit on R&D, which is substantially lower compared to other Big Tech peers. Its not clear why, but at least in Apple’s case, I think this is partially explained by Apple’s strategy to “Acquire new technologies/products” through acquisitions of small startups.

Btw, Nvidia isn’t a heavy spender on R&D yet - however as AI usage spreads, its likely that we will see Nvidia also ramping up its R&D spend in coming years.

Detailed R&D Spend by individual Big Tech companies can be seen in the table below. All values in US$ Billion

That’s all for this post! Thanks for reading! 👋