Dan Gallagher reports in the Wall Street Journal:
The cost to generate that growth is going upward at a faster clip. Combined spending on research and development is expected to rise 24% in 2018, while capital expenditures for the five are expected to surge by 48% compared with last year. For Big Tech, these expenses reflect the rising costs of running their current businesses while also developing new ones to stay more competitive—in a world where their most significant source of competition is mostly each other.
By being so big and still growing so fast, the world’s largest technology companies are in uncharted territory. But pulling that off has been expensive—and will be getting even more so.
Combined annual revenue for the world’s five largest companies by market value already tops the gross domestic product of 90% of the world’s countries. And their revenue keeps climbing at a surprising rate. Apple Inc., AAPL -1.66% Amazon.com , AMZN 0.51% Alphabet Inc., GOOGL -2.54% Microsoft MSFT -1.77% and Facebook FB -0.78% are expected to average sales growth of 21% on a combined basis this year compared with 19% last year. Results for the June quarter coming over the next two weeks from the five giants are expected to show combined growth of 26% year-over-year compared with 8.7% growth projected for the S&P 500, according to FactSet.
But the cost to generate that growth is going upward as well—at a faster clip. Combined spending on research and development is expected to rise 24% in 2018, while capital expenditures for the five are expected to surge by 48% compared with last year. For Big Tech, these expenses reflect the rising costs of running their current businesses while also developing new ones to stay more competitive—in a world where their most significant source of competition is mostly each other.
Apple, for instance, is expected to boost its R&D spending by 17% to $14 billion for this calendar year, outpacing the 10% revenue growth analysts expect for the same period. The iPhone maker’s R&D bill has been steadily climbing over the last several years as it seeks out new hit products to offset its slowing smartphone and tablet businesses. But Apple still underspends Google-parent Alphabet as well as Microsoft and Amazon in both whole dollars and in percent of revenue, leading Toni Sacconaghi of Bernstein to note last week that the company may still be “underinvesting in innovation.”
Capital spending will also rise sharply—especially for companies like Amazon, Microsoft and Google that have to keep building out network infrastructure to deliver their growing list of cloud-based services. Google’s capex bill alone is projected to surge more than 50% this year, while analysts expect increases of more than 30% for Microsoft and Amazon. And most projections for Amazon exclude the capital leases that the company also uses.
Tech investors who value growth above all else have largely shrugged off these bills. Amazon’s shares are up 57% so far this year. And Facebook has surged 30% since its last report, as investors are betting the social network’s advertising business won’t be permanently hobbled by its missteps with user data.
But those sorts of gains set up some risk if growth numbers disappoint. Look no further than Netflix , which saw its shares sink Monday after reporting disappointing subscriber and revenue growth for the second quarter. The streaming company’s market value had more than doubled this year even as it burned billions in cash to produce more content, to keep subscribers flowing in. While an extreme example, Netflix shows what happens when investors focused on hypergrowth start taking a closer look at their bills.
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