Amazon.com, Inc. (AMZN) and Facebook Inc (FB) are eating. Shares of both stocks surged last week after blowing past Q1 earnings expectations. Not only do both companies have great, addictive products that hundreds of millions of people use routinely, they share another quality.
Both AMZN and FB have iconic, brilliant CEOs. Investors know this. But what’s interesting is that both these visionary CEOs are making bold, unusual choices that are clearly reflected on the income statements.
Namely, Amazon and Facebook are spending heavily in research and development — something that’s not particularly surprising given the exciting new areas that both companies are investing in.
FB, AMZN on the Cutting Edge
It’s rare as investors to celebrate costs. Why on earth would elevated R&D spending be something to celebrate?
Well, it shows a willingness to pursue new products and services that can serve to differentiate AMZN and FB from the competition — and perhaps spark the next 1-, 10- or 100-billion-dollar idea.
Amazon’s R&D spending was up 28% in the first quarter, while FB’s R&D spending was up 26% year-over-year in Q1. AMZN now tops in corporate America when it comes to R&D spending, while Facebook is on track to be in the top 15, says Justin Fox of Bloomberg View.
When you look at some of the products and technology these two tech giants are developing, you can see the results pretty clearly.
AMZN, for instance, not only has robots that roam its warehouse floors retrieving packages, it has GPS-guided drones capable of delivering product orders in 30 minutes or less. That’s not to mention the other cool tech, like its Kindle e-readers and AI-equipped Echo speakers, that Amazon’s spent major R&D dollars on to develop in-house.
And then there’s Facebook. Building, maintaining, and changing its News Feed algorithm so users remain interested, engaged and hooked ain’t easy. It’s also building out its Facebook Video efforts, looking for ways to improve its other properties like Instagram, WhatsApp and Facebook Messenger, while simultaneously pouring money into Oculus, the virtual reality company it acquired a few years back, to make VR go mainstream.
FB CEO Mark Zuckerberg has big dreams when it comes to VR. He eventually sees a world where billions of people will be able to attend professional sports games, go to university lectures and even visit their doctor — all by using VR.
At the end of the day, AMZN and FB are all about making their services better at almost any cost. While the R&D costs can seem excessive in the short-term, both stocks seem to be performing pretty well over the last few years.
Especially considering recent Bloomberg research showing companies that invest more in R&D show greater capital appreciation than those that don’t, Facebook and Amazon shareholders should embrace the old phrase, “If it ain’t broke don’t fix it.”
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at@divinebizkid or email him at editor@investorplace.com.
