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R&D Spending Comparison For Social Media Companies

Research And Development. Source: Flickr Image

Research and development is a big part of social media companies such as Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Snap (NYSE:SNAP) and Pinterest (NYSE:PINS) due to the extremely competitive nature of their businesses.

These companies rely heavily on research and development to create the next generation of products or to improve the existing ones for growth.

Without research and development, they will not go very far ahead as social media users will easily switch to other platforms if they find the existing ones outdated or no longer relevant to their needs.

Therefore, Facebook, Twitter, Snap and Pinterest will need to constantly innovate and bring out new products in order to keep their users hooked and spend as much time as possible on their platforms.

Social media companies spend a lot of resources on research and development not only for products development but also for advertising technology.

For example, Snap Inc. stated in its financial reports that it constantly develops and expands its advertising products and technology in order to provide a strong and scalable return on investment to advertisers.

These improvements include advertisement delivery methodology, measurement capabilities and self-serve tools.

In addition to software, social media companies also spend heavily on hardware.

For example, Snap Inc. spends considerable resources and investment on architecture that powers its products, such as optimizing the delivery of billions of videos to millions of people around the world every day.

Facebook, Twitter and Pinterest are no exception.

In this article, we will look at and compare the research and development spending of several social media companies, including Facebook, Twitter, Snap and Pinterest.

Other than the R&D spending itself, we also will look at other R&D-related metrics, including the R&D spending to revenue ratio, R&D spending to total expenditure ratio as well as the share-based compensation included in the R&D.

Therefore, let’s keep going!

Research & Development Spending (Including Facebook)

Social media companies' R&D spending

Social media companies’ R&D spending

* R&D expense is a measurement determined in accordance with GAAP and is obtained from the respective financial reports.
* Facebook, Twitter, Snap and Pinterest’s R&D expenses include share-based compensation expenses.
* All companies’s fiscal year begins on Jan 1 and ends on Dec 31.

When we combine the R&D spending of all social media companies into the chart above, Facebook seems to be the only company that is spending tens of billions of dollars on research and development.

For other companies, their R&D spending pales in comparison to that of Facebook.

For example, Twitter, Snap and Pinterest’s R&D expenditure has not even reached the $2 billion mark as of fiscal 2020.

On the contrary, Facebook’s annual R&D figure has already surpassed $18 billion as of fiscal 2020, a figure that is at least 18X higher than the closest contender.

Not only that but Facebook’s research and development expenditure has grown more than 200% between fiscal 2016 and 2020, with R&D expense trending from $6 billion reported in fiscal 2016 to as much as $18 billion reported in fiscal 2020.

In addition, Facebook’s R&D growth rate increased the most in fiscal 2020 at 36% year-over-year, beating all prior results.

In short, it is not a surprise to see that Facebook has been the dominating company in the social media space all these years given its enormous R&D budget.

Research & Development Spending (Excluding Facebook)

Twitter, Snap and Pinterest's R&D spending

Twitter, Snap and Pinterest’s R&D spending

* R&D expense is a measurement determined in accordance with GAAP and is obtained from the respective financial reports.
* Facebook, Twitter, Snap and Pinterest’s R&D expenses include share-based compensation expenses.
* All companies’s fiscal year begins on Jan 1 and ends on Dec 31.

Without Facebook, we can see a much clearer picture of the R&D spending of smaller social media players such as Twitter, Snap and Pinterest.

These companies’ R&D spendings are quite equal in terms of monetary value.

Of all companies, Snap Inc. seems to be the fastest-growing in terms of R&D expenditure.

For example, Snap Inc.’s R&D spending has grown nearly 500% since fiscal 2016.

As of fiscal 2020, Snap Inc.’s R&D spending finally broke the $1 billion mark to reach $1.1 billion, a new high for the company since its IPO in 2017.

While Snap’s R&D expense total $1.5 billion back in fiscal 2017, the majority of that actually came from stock-based compensation expense triggered by the company’s IPO in the same year.

Therefore, the sudden surge in R&D expense was mostly a one-time event that should not occur on a regular basis.

Snap’s latest R&D spending is a more normalized figure for the company.

The same goes for Pinterest when the company saw its R&D spending surged to $1.2 billion in fiscal 2019.

For your information, Pinterest had its IPO in 2019 and that has triggered a massive amount of stock-based compensation expense being incurred within the R&D segment.

As of fiscal 2020, Pinterest’s research and development spending totaled only $606 million, a more normalized figure for the company.

Of all companies, Twitter seems to be the one growing the least in terms of R&D budget in the last 5 years.

However, Twitter grew its R&D spending the most in fiscal 2020 at 28% year over year, even beating Snap’s year-over-year growth rate of 25%.

In short, Snap Inc. ranks first in terms of R&D spending at $1.1 billion in fiscal 2020 and Pinterest ranks the lowest at an R&D spending of only $606 million reported in the same fiscal year.

Research & Development Spending To Revenue Ratio

R&D spending to revenue ratio

R&D spending to revenue ratio

* R&D spending to revenue ratio comes from the author’s own calculation.
* All companies’s fiscal year begins on Jan 1 and ends on Dec 31.

The ratio of R&D spending to revenue measures the intensity of the research and development activities with respect to sales.

The higher the ratio, the more intense the R&D is for the company.

That said, according to the chart, Facebook seems to be at the lowest rank when it comes to the ratio of R&D to revenue.

As seen, between fiscal 2016 and 2020, Facebook’s ratio clocks in at only 20%, the lowest among all social media companies.

The company with the highest ratio goes to Snap Inc. at more than 40% throughout the last 5 years.

As of fiscal 2020, Snap Inc. reported an R&D to revenue ratio of 43.9%, which was more than twice the ratio of Facebook.

At this ratio, Snap spent an incredible 40% of sales on research and development.

Therefore, Snap has the most intense research and development activities compared to other social media companies.

For Twitter, its ratio of R&D spending to revenue has been slightly better than that of Facebook since fiscal 2016.

Twitter reported a ratio of 23.5% as of fiscal 2020.

Pinterest claims the second at 35.8% of sales for its R&D budget in fiscal 2020.

Again, Snap and Pinterest’s high R&D spending to revenue ratio reported in fiscal 2017 and 2019 was mainly driven by the IPO of these companies which occurred in the same fiscal years.

The IPO has triggered a large number of share-based compensation expenses being incurred as part of the R&D spending.

Research & Development Spending To Total Costs And Expenses Ratio

R&D spending to costs and expenses ratio

R&D spending to costs and expenses ratio

* R&D spending to total costs and expenses ratio comes from the author’s own calculation.
* Total costs and expenses include costs of revenue and operating expenses.
* Total costs and expenses are measurements determined in accordance with GAAP and are obtained from the companies’ respective income statements.
* All companies’s fiscal year begins on Jan 1 and ends on Dec 31.

R&D spending is actually a part of a company’s costs and expenses of doing business.

Therefore, it’s worth finding out how much costs and expenses are being spent on R&D activities.

The ratio of R&D spending with respect to total costs and expenses is exactly what we need to measure the percentage or the portion of a company’s total costs and expenses that goes into research and development.

Basically, this ratio measures how optimized a company’s costs and expenses are for research and development.

Therefore, the higher the ratio, the more optimized a company’s costs and expenses are for research and development as a higher portion of costs and expenses are being channeled into R&D activities.

According to the chart, it’s interesting to see that Facebook actually has the highest ratio of R&D spending with respect to total costs and expenses among all social media companies despite having the lowest R&D spending to revenue ratio which we saw earlier.

For example, Facebook’s ratio of R&D spending to total costs and expenses clocks in at 34.6% in fiscal 2020, the highest among all companies in the same fiscal year.

And, Facebook’s ratio was even higher in prior years, way ahead of all its peers.

Facebook can only achieve this result when its total costs and expenses are the most optimized for R&D activities compared to Twitter, Pinterest and Snap.

On the contrary, Twitter has been a poor performer in terms of the ratio of R&D spending to total costs and expenses.

In other words, Twitter’s total costs and expenses are the least optimized for research and development compared to other social media companies.

Shared-Based Compensation Expenses Included In R&D Spending

Stock-based compensation expenses included in R&D spending

Stock-based compensation expenses included in R&D spending

* Shared-based compensation expense included in R&D is a measurement determined in accordance with GAAP and is obtained from the companies’ respective financial reports.
* Ratio expressed in percentage is calculated by the author and is based on the division between shared-based compensation expense included in R&D and total R&D spending.
* All companies’s fiscal year begins on Jan 1 and ends on Dec 31.

It’s a normal practice for tech companies such as Facebook, Twitter, Snap and Pinterest to reward their employees with companies’ stocks.

Therefore, it’s worthwhile to take a quick look at the percentage of the R&D spending that comes from stock-based compensation.

In this case, the chart above shows the percentage of R&D spending that comes from share-based compensation expenses.

According to the chart, Snap Inc. seems to be the company that is leading the packs.

For example, in the last 3 years, nearly half of Snap’s R&D spending was paid by the company’s stocks.

On the contrary, Facebook used stock-based compensation the least among all social media companies to reward its employees who involved in the R&D.

In this aspect, Facebook’s ratio reached only 26.7% as of fiscal 2020, and has been on a decline since fiscal 2016.

A similar trend is also observed for Twitter whose ratio had also been on a decline.

Twitter’s stock-based compensation ratio reached only 32% as of fiscal 2020, slightly higher than that of Facebook.

On the other hand, Pinterest’s ratio has been on a rise and reached as much as 36% as of fiscal 2020, second only to Snap Inc. in the same fiscal year.

While some of these tech giants have been less inclined to use stock-based compensation as a form of reward, the percentage is still very high.

For example, stock-based compensation made up a quarter of the total R&D spending for Facebook and nearly half for Snap in the latest fiscal year.

Conclusion

In conclusion, Facebook is the leading social media company when it comes to R&D budget.

As of fiscal 2020, Facebook spent a whopping $18 billion on research and development, far ahead of Twitter, Pinterest and Snap.

However, Facebook was ranked at the bottom in terms of R&D spending to revenue ratio.

The company reported an R&D spending to revenue ratio of only 21.5% in fiscal 2020 compared to the much higher 43.9% ratio reported by Snap Inc. in the same fiscal year.

From the perspective of costs and expenses, Facebook leads again at a ratio of 34.6% as one of the most optimized social media companies in managing its R&D spending with respect to the company’s total costs and expenses.

Nearly half of Snap’s R&D spending was paid by stock-based compensation in fiscal 2020, making it a top social media company that rewarded its R&D employees with the company’s stocks.

In contrast, Facebook’s share-based compensation expenses made up only 26.5% of the company’s total R&D spending as of fiscal 2020, nearly half of Snap’s ratio.

References and Credits

1. Financial figures for all companies discussed above were obtained and referenced from their respective financial statements which can be obtained from the following links:

a) Facebook Investor Relations
b) Pinterest Investor Relations
c) Twitter Investor Relations
d) Snap Investor Relations

2. Featured images in this article are used under Creative Commons License and sourced from the following pages: Department of Computer Science NTNU and Department of Computer Science NTNU.

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