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TheStreet Open House

Apple: Frugal to a Fault?

With its sleek iPod nano and all-in-one iMac computer, Apple (AAPL - Get Report) is often perceived by its fans as a pre-eminent innovator.

It may come as a surprise, then, that much of the company's recent financial -- and stock -- success has resulted from merely holding the line on one of the sources of that innovation: its spending on research and development.

Even while Apple's revenue has skyrocketed in recent years -- and even as expectations for future products and success have exploded -- what the company has spent on R&D has risen only modestly. As a portion of overall sales, such expenses have actually fallen by more than half.

Though analysts generally praise Apple for its frugality, some warn there's a limit to how much longer the company can squeeze juicier near-term profits out of its R&D line.

"Ultimately, for them to sustain their growth and be successful in the long term, they're going to have to move in new directions and tackle some new product lines that they don't have and haven't historically done," says Van Baker, an analyst who covers the company for industry research group Gartner. "That's going to take significant investment."

Apple spokeswoman Natalie Kerris didn't know whether the company had set goals for R&D spending. But the pace at which Apple allows its investment in innovation to grow in future quarters will likely go a long way toward determining the company's future profit growth.

Although there's no hard-and-fast rule for what portion of its budget a company should devote to R&D, some analysts say Apple is approaching minimal levels. As a portion of sales, the amount Apple has spent on R&D has fallen steadily every year since fiscal 2001, when the company devoted 8%.

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