Apple

Apple Stock: Failing to face the reality of slow growth for years to come

Reality Expectations Concept

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While Apple (AAPL) looks set to release a mixed reality device next year, the market is not facing reality with the stock. The tech giant looks set to launch the new device based on recent leaks, though the speculated device still seems irrelevant to the company for years. My investment thesis continues to warn investors that future growth rates do not match current stock valuations.

mixed reality

The operating system that powers Apple’s new mixed reality device appears to have a name now in “OS reality”. iOS developers have detected the OS name referenced in multiple places in source code and App Store downloads.

The news suggests Apple is getting closer to releasing an AR/VR device after reports suggested the tech giant had been struggling to complete the rumored device since at least 2017, when Apple bought the device. VR company VRvana. The latest credible source of information has the delayed device until early 2023 with a release before WWDC in June allowing the developer conference to focus on AR/VR applications. The company plans to launch a sleeker pair of AR glasses at a later date.

Reports of the device overheating as well as camera and software issues question the timing of the device’s release, but software updates suggest that Apple is preparing the ecosystem for an imminent release of the device. device next year.

The biggest question remains the revenue opportunity in the AR/VR segment. The most recent major product launched by Apple was the Watch in 2015. The Apple Watch sold approximately 8.3 million units in the 2015 launch year and saw sales reach 46.1 million units in 2021. COVID-19 definitely created a boom in the category in 2020, driving sales growth 40x.

Apple Watch sales trend

Source: App Company

*The table incorrectly shows 2019 twice, instead of 2021.

The Watch product currently generates between $12 billion and $14 billion in annual sales. Any AR/VR device will sell far fewer units due to the estimated price in the $1000 range compared to a watch that sells for $300+.

Katy Huberty, an analyst at Star Apple, had previously estimated that the device would generate minimal revenue in the first few years. Its forecast calls for FY26 AR/VR product revenue to hit $29 billion, based on the tech giant shipping 31 million units at an average price of around $750. Analyst Ming-Chi Kuo expected 2023 sales of 3 million units with a second-generation device approaching 10 million units in 2024. Of course, those numbers predate the recent product delay.

At first, the Apple Watch only produced $3 billion in annual sales. The product only really took off with the 2nd/3rd generation released in 2018 and 2019.

A similar path for the AR/VR device would predict that a successful product would not provide a hardware growth path until 2026 and beyond. Keep in mind that Apple is expected to generate $463 billion in revenue for FY25.

Even a product with $10 billion in annual sales won’t move the needle for Apple’s Wearables, Home and Accessories category alone for the tech giant which reported FQ1’22 category revenue of more than 14 billions of dollars. Total FY21 category revenue was $38.3 billion, making a successful AR/VR device only a fraction of that division’s revenue alone. Between the watch and the AirPods, the AR/VR device will struggle to become the first wearable device.

Apple wearables, home and accessories revenue trend

Source: App Company

Strong competition

While most people have already assumed that Apple will release a successful mixed reality device sometime next year, the tech giant’s success isn’t guaranteed next year. Metaplatforms (FB) already has a hot AR/VR device on the market with plans to at least match Apple, if not surpass the company in extra category product releases.

The Oculus Quest 2 was a hot vacation product topping the App Store charts. Consumers have already spent over $1 billion on Quest store content.

At Facebook Connect, CEO Mark Zuckerberg described the cadence of the product as part of the development plan leading the Reality Labs division to produce a quarterly loss of $3.2 billion. Cambria Project looks set to match at least the mixed reality headset coming out of Apple likely in early 2023. The potential “Oculus Pro” appears as the next device in a planned step towards true AR glasses in the future after launch of smart glasses with Ray Ban recently.

The big problem is that Apple faces a competitive landscape in the AR/VR device category. The competition seems much fiercer than the Watch segment where several Chinese and a small domestic company are the next toughest contenders.

Investors need to face the reality that AR/VR success is not guaranteed and will not materially impact revenues and profits for at least 5 years, as the way of the clock. After the big 1’22 FQ earnings beat closed end demand and 5G iPhone surge, the new reality is slow EPS growth for a while. Analysts correctly expect Apple to produce EPS growth in the range of 5-10% over the next 3-4 years.

Apple's EPS estimates for the current and next fiscal year
Data by YCharts

The biggest risk with stocks trading at 28x FY22 EPS estimates is a period when sales dry up due to the push forward during economic lockdowns forcing WFH scenarios. As evidenced by booming watch sales figures in 2020, consumers could quickly turn to epic travel this year instead of buying another smartwatch or iPhone.

Most companies in netflix (NFLX) to Roblox (RBLX) to even meta-platforms have already encountered issues with weakening sales trends. Even big companies like Apple cannot avoid such trends.

Carry

The main takeaway from investors is that Apple investors have to deal with the new reality. The tech giant’s next mixed reality device isn’t a guaranteed hit, but the market is already pricing in massive sales for a device that clearly won’t deliver hardware sales for another 5 years.

Investors should use the stock price recently high above $170 to exit Apple near the highs.