In 2017, chip giant Intel (NASDAQ: INTC) told investors that it had set a goal to reduce its operating expenses as a percentage of revenue to about 30% by 2020 . The purpose of that target was to improve profitability in a bid to drive the stock price higher (because investors generally value higher profits).
Back in January, Intel told investors that it expected to achieve its target spending goal by 2019 , pulling in the schedule by a year. On the most recent earnings call, just three months later, the company says that it now expects to hit that goal this year -- two years ahead of schedule -- thanks to faster-than-expected growth in revenue.
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It doesn't appear that the company is planning to stop trying to bring down spending as a percentage of revenue. According to CFO Bob Swan, Intel expects that as it continues to "accelerate growth and invest in key priorities," spending as a percentage of revenue can keep declining from here.
So, what does this mean for investors?
One of two things
If Intel's spending as a percentage of revenue continues to drop simply because the business is experiencing an accelerated revenue growth rate, then that's a good thing. What such a scenario would mean is that Intel can continue to boost its spending in key areas (e.g., product development and fundamental technology development) at a reasonable clip without pushing operating profit margins down.
That's ultimately the right way to run a business -- make investments in new products, technologies, and go-to-market strategies that deliver a significant payoff.
If Intel goes overboard, however, trying to bring that spending as a percentage of revenue down by starving the development of future products and technology, then that's the wrong long-term strategic move.
In the near term, keeping a lid on spending could lead to accelerated profit growth and happy stockholders. But if those actions mean that Intel's products aren't as competitive as they need to be in the future, then over the long term the company's revenue and gross profit margins could be negatively impacted, hurting overall profitability.
It's critical, then, that Intel make sure that it's not sacrificing the development of future products and technologies -- especially its chip manufacturing technology, which has been quite problematic for the company in recent years -- to achieve its profit goals.
Even as the company aggressively tries to bring down its spending as a percentage of revenue, it's worth keeping in mind that Intel's annual research and development budget is now on a $13 billion-plus run rate, which is substantially higher than that of any other competing chip company.
It's not as though Intel is aggressively cutting research and development spending -- it was actually up in 2017 and looks to be about flat in 2018 -- but the fact that Intel seems to be putting a lid on the growth rate of that spending could unduly constrain some of the company's long-term product, technology, and, ultimately, business goals.
We'll see over the next few years, based on what products the company puts out and how well they perform in the marketplace, if Intel's constrained spending ultimately served to strengthen the business or weaken it.
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