CHART OF THE DAY: The Correlation Between R&D Spending And Stock Prices

The decision to spend on research & development can be a tough one for corporate finance managers as they make budgeting decisions.

However, you have to spend money to make money.

And that’s the conclusion of Goldman Sachs’ Robert Boroujerdi and his team.

In a new report titled, “The Search for Creative Destruction,” the Goldman analysts examine the connection between R&D spending, revenue growth, and stock price returns.

“We review Technology, Internet and Biotech names currently in the NASDAQ 100 and find a strong correlation between R&D and Sales Growth (8-year CAGR through 2012; R2 75%) and between the latter and stock price returns over this period (R2 71%),” they wrote.

In effect, companies with strong R&D spending also see the best stock returns.

The relationship between sales growth and stock price gains may already be intuitive.

But it’s interesting to see the the connection made to R&D, which is an expense.

“In our view, R&D reflects the continued commitment to adapt to and stay ahead in an ever-evolving competitive landscape,” they write.

“While not all R&D spend implies that the money is being well-spent — i.e., it does not necessarily translate into new and innovative products or services, we do find a strong correlation with revenue growth.”

And that’s something that should make investors happy.

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