Is R&D a cost or an investment? How a value investor should look at R&D

It is inarguable that R&D leads to growth and therefore it becomes important that these expenses are treated properly from an investment analysis perspective.

About $200 billion is spent on research and development every year by the “Big 5” tech companies: Amazon, Alphabet, Meta, Apple, and Microsoft. Based on how accounting works right now, this is an expense.

In comparison, these companies have a totally free cash flow of about $240 billion at the moment. About $7 trillion is the enterprise value, which is the total market value of all debt and equity after cash is taken into account.

From an investment point of view, free cash flow is important because scientific investors (or most value investors) and valuation experts think it is the most important way to measure a company’s value.

Given how much these companies spend on R&D compared to how much free cash flow they have, it is important that R&D costs are treated correctly when analyzing investments.

It’s clear that new products help a company grow and that research and development lead to new products. So, there’s no question that R&D leads to growth. Read More