R&D: A long-term investment

Investments are made for the long term. Wouldn’t it be nice to know that companies have the same focus on the future? Innovation can fuel a company’s growth, but it doesn’t happen overnight. Rather, it is the result of a disciplined approach to investing in and executing strategic plans.

Innovation takes time — very often years — and can be expensive. For example, it wasn’t so long ago that Nvidia was considered to be just a gaming company. Today it is viewed as one of the largest companies in the world with a dominant position in the hardware and software tools powering the artificial intelligence (AI) revolution. Nvidia’s explosive growth has been fueled, in part, by the company’s investment in its own future.

One way to measure a company’s dedication to innovation is to look at its investment in research & development (R&D). In fiscal 2023, Nvidia earmarked about $7.34 billion to R&D, up from about $5.27 billion from the previous year. Overall, Nvidia spent about 27% of the $26.97 billion of revenue it generated in fiscal 2023 on R&D.¹ This is a reminder that complacency is a risk even for industry leaders. Staying on top typically requires investing in the future to fend off competitors hungry to cut into market share.

A focus on R&D

Ironically in today’s world, one way to increase profitability has been to cut R&D investments. For accounting purposes, R&D can be a drag on earnings in the year the investment is made, but for many companies this commitment to development offers the potential for higher sales and profitability down the road.

Scrimping on R&D may be penny-wise and pound-foolish. In other words, spending on R&D and creating a culture of innovation can be a long-term commitment that usually doesn’t yield immediate results.

When comparing the Nasdaq-100 ® Index (Invesco QQQ’s underlying index) to the S&P 500 ® Index and Russell 1000 Growth ® Index, companies held within the QQQ portfolio tended to spend more money on R&D, as well as reinvest a greater percentage of their sales via R&D.

Innovation beyond the tech sector

Needless to say, many leading technologically-oriented companies are driving innovation, ranging from advancements in AI to data analytics to self-driving cars, among many other areas. But non-tech industries represented in the Nasdaq-100 have also invested in R&D to drive growth.

For instance, companies in the food and beverage industry are tapping new technologies across their products’ lifecycles. Recent industry examples include employing drones to monitor the health of cocoa farms, creating plant-based alternatives for dairy cheese, and utilizing 3D printing methods to manufacture fully recyclable squeeze bottles.

In many cases, these investments may cost more money in the short term but offer the potential for sustainable long-term growth and other benefits in the future.

Measuring R&D in QQQ

We believe most companies held within QQQ have established a culture of innovation, and that their commitment to R&D has led to considerable exposure to a number of growing, transformative themes.

The chart below outlines patent contributions from companies across 35 different disruptive technologies within the Nasdaq-100, QQQ’s underlying index (measured over the 12-month period ended November 30, 2023). Put another way, some of these themes and technologies might contribute to a company’s bottom line today, while others may be future drivers of earnings growth 5, 10 or even 20 years down the road.

Strong patent activity has continued within Nasdaq-100 companies

Fifty-eight companies in the Nasdaq-100 (representing 83% of index weight) recently filed patents across one or more of the 35 key areas within disruptive technology such as AI, clean energy, or Blockchain.

No matter how much the market environment changes, the desire and need to innovate remains constant. We think companies will continue to lay the groundwork for better products and new services as innovation continues to push us into the future.