U - Apple Vision Pro: High Price Tag And Questionable Stickiness

2023-06-07 16:06:42 ET

Summary

• We remain sell-rated on Apple Inc. stock after the company unveiled its long-awaited mixed-reality headset at WWDC 2023.
• Apple shares hit an all-time high at $185 due to the WWDC event reversing concerns about Tim Cook’s status as an “innovator,” but closed slightly lower.
• We’re constructive on Apple’s newest innovation since the Apple Watch in 2014, but don’t expect the Vision Pro to do well due to the high price and limited mainstream adoption.
• We also continue to see macro headwinds weighing on consumer spending for smartphones in 2H23, although inventory corrections are underway.
• The stock is up 47% YTD, outperforming the S&P 500 by 35%. We see favorable exit points at current levels.

Apple Inc. ( AAPL ) just unveiled its long-awaited mixed-reality headset, Apple Vision Pro, "the first Apple product you look through and not at." Some would say we're seeing an episode of Netflix's (NFLX) Black Mirror come to life. We remain sell-rated on AAPL stock after the start of WWDC 2023 yesterday.

Apple stock surpassed its 52-week-high of $182.94 set in January 2022; to put this into perspective, the stock was already trading extremely close to its 52-week-high and only rose around 2.2% Monday morning in the lead-up to the WWDC event. In fact, Unity Software Inc. (U) surged much more, around 26%, after Apple announced it would be collaborating with the game-development software maker on the Apple Pro Headset.

We're constructive on Apple regaining its innovative edge with the launch of its AR/VR combo headset, Apple Vision Pro, and venturing into the augmented reality/virtual reality space. Still, we see hurdles to Vision Pro's success, especially after we confirmed the product's price at $3,499, which we had speculated about in our previous note . We expect the product will face limited mainstream adoption as inflationary pressures and macro headwinds pressure consumer discretionary spending, and the AR/VR market remains in its infancy.

Additionally, we believe Apple stock is over-priced for near-term macro headwinds pressuring its primary revenue source, iPhones, discussed in more detail in our downgrade note last month. We continue to recommend investors explore favorable exit points at current levels and revisit once the near-term headwinds have been priced in.

The following chart outlines our rating history on Apple.

Vision Pro: High price, stickiness, & limited adoption

Apple kicked off the WWDC event by announcing its Vision Pro headset to launch early next year, among other developments. Here's what we know after yesterday: Apple's Vision Pro headset is built with "five sensors, six microphones, 12-cameras" powered by its own M2 chip and a new R1 chip designed for real-time sensor processing, and will run on visionOS, a new platform. The AR/VR headset can run a multi-app, 3D engine. Battery life is expected to be around 2 hours, which is standard to competition in the field now. Vision Pro marks Apple's first major product since the launch of the Apple Watch in 2014, and there are a lot of eyes on CEO Tim Cook, wondering if he can pull this off.

Our concern rests on the public adoption of the product and the availability of app options on the visionOS platform. Apple explained it would be working to build a third-party ecosystem of apps with companies including Adobe (ADBE), Cisco Systems (CSCO), and Microsoft (MSFT), among others, which is promising. Disney's (DIS) Bob Iger also announced during yesterday's conference that Disney+ would run on the new headset, which should be especially interesting considering Vision Pros' "23-million pixel panel has more pixels than a 4K television per eye."

We believe Apple is building a solid foundation for Vision Pro; however, we see Apple facing increased competition with Meta Platforms' (META) Quest 3, which is offered at the more affordable price of $499 and set to release earlier than Vision Pro this fall. Meta currently dominates the market, with 80% of the global AR/VR market share due to the Quest headset line.

We see two interconnected hurdles for Apple's newest innovation: high price and the question of affordability, coupled with limited mainstream adoption . The AR/VR market is still in its early innings, estimated to grow at a CAGR of 13.72% between 2023-2027. We expect the product to receive lukewarm reception among consumers, especially given the current macro headwinds and tightening discretionary spending. We don't see consumers justifying the high price tag for entertainment products; we do recognize, however, Apple's efforts to market Vision Pro as a "spatial computer," incorporating Microsoft's Office Productivity suite, Mail, Music, Messages, and Safari.

We're concerned about how consumers will weigh the stickiness and usefulness of AR/VR tech with its price tag. We know for sure that AR/VR market is not a spending priority when things in the economy go south; the market suffered a steep drop last year due to macro headwinds, in which shipments fell 20% Y/Y. We're cautiously excited about Vision Pro, but don't see the product serving as a major growth catalyst toward 1H24.

Valuation

Apple stock is expensive, which is nothing new. The stock is trading at 26.7x C2024 EPS $6.70 compared to the peer group average of 23.5x. The stock is trading at 6.9x EV/C2024 sales versus the peer group average of 5.5x.

The following chart outlines Apple's valuation against the peer group.

We believe Apple is trading at a high valuation for its historical trading range, and know for certain that the Vision Pro headset won't boost sales in 2H23. We don't see the company growing faster in the coming few years than it did over the past decade. We don't believe Vision Pro is Apple's turnaround moment in terms of adaptable, innovative products that will gain mass traction. We see attractive exit points at current levels and recommend investors explore them.

Word on Wall Street

Wall Street is overwhelmingly bullish on Apple stock. Of the 42 analysts covering the stock, 32 are buy-rated, nine are hold-rated, and the remaining are sell-rated. We know our bearish sentiment won't sit well with the Apple bulls, but we emphasize that we're bullish on Apple in the long run but expect the stock to dip in 2H23 and recommend investors exit at current levels and revisit toward the end of the year.

The following chart outlines Apple's sell-side ratings.

What to do with AAPL Stock

We remain sell-rated on Apple stock after the WWDC 2023 conference. We believe the company's AR/VR headset is extremely impressive with its dual productivity and entertainment nature, but also equally important, it's highly-priced with an ASP of $3,499. We're concerned about affordability and mainstream adoption by consumers. We also believe Apple Inc. stock is highly valued for the near-term headwinds pressuring smartphone sales in 2H23; the stock is trading closer to its new 52-week high of $184.95, and we see favorable exit points at current levels.

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