Apple Stock: Have You Seen These Images? (NASDAQ:AAPL)

Apple Inc.’s (NASDAQ:AAPL) most anticipated keynote event of the year – WWDC 2022 – is set to begin today through Friday. It has been speculated for months that WWDC 2022 will feature a “wider-than-usual breadth” of new and upgraded products and services, spanning a series of updated operating systems and revamped devices across existing product categories. In addition to exciting product and service feature upgrades, many are looking forward to the potential debut of Apple’s AR/VR headset, or at least hints of what the forthcoming new product might entail.

The company’s AR/VR headset has progressed from still ironing out some critical developing challenges (e.g., device overheating, camera features, etc.) a few months ago to being presented to the board for preview in mid-May. The rapid improvement timeline underscores management’s determination to begin selling the headsets by early next year, which would imply an official debut to kick-off marketing efforts some time before year-end, if not this week, based on Apple’s historical product launch roadmap.

Apple’s AR/VR project will be the company’s first “major new product category since the Apple Watch in 2015,” and has been regarded as a key driver to expanding its valuation outlook. Apple’s extension of its foray into another nascent, high-growth category will also bolster its competition against Meta Platforms (FB), the pioneer of the recent excitement surrounding reimagined immersive social experiences, and unlock greater value to the emerging AR/VR technology by accelerating its roadmap to mass market adoption.

In addition to the highly speculative Apple Car project, the impending AR/VR headset debut will mark the beginning of a new product category set to catapult the Apple’s stock’s valuation into newer heights. The launch of the mixed-reality headsets represent another growth driver set to further bolster and extend Apple’s already-stellar cash outlook into the next decade – one of the most appealing features of the stock as a long-term investment pick despite the currently uncertain macroeconomic climate.

The Apple Memoji Teaser – Have You Seen These Images?

Apple’s hidden promotional gesture for WWDC 2022 likely already lays hints at parts and pieces of its upcoming mixed-reality endeavors. Try visiting Apple.com/apple-events on your iPhone and click on the Memojis on the “WWDC22” event post. You will be redirected to an AR-enabled screen, which displays a series of three cards at a time (we have seen five variations after playing around on the platform sporadically throughout the day). To not ruin the fun for you, we have decided not to include the images to the article. But what we have seen so far includes the following Memojis:

• Red: The red Memoji is set in front of a background that imitates the Apple security fingerprint icon. It is speculated the backdrop could imply enhanced user privacy measures with the upcoming roll-out of iOS 16 to complement the App Tracking Transparency (“ATT”) privacy feature that debuted through iOS 14, which risks further restrictions on ad-tech-reliant companies like Meta Platforms and Snap (SNAP).
• Blue: The blue Memoji hovers over a backdrop that sort of imitates the multi-colored Siri display. This could potentially imply further integration of the smart AI assistant across Apple’s ecosystem of product and service offerings, including the upcoming mixed-reality headset. Apple has been speculated to automatically include Siri access in third-party apps for its upcoming VR/AR products to streamline immersive experiences for users.
• Green: The Memoji has a green background of code akin to the infamous lines observed in The Matrix. A closer look would show the word “async,” which potentially refers to Apple’s “Asynchronous Sequences”, a series of app development protocols introduced in WWDC 2021. The structure builds on Apple’s “Swift” programming language used in building AppleOS apps. The background displayed on the green Memoji card complements expectations for a “new version of SwiftUI for building AR and VR apps,” which paves the way to the fast-approaching roll-out of the new device category.
• Magenta: The Memoji is set against a magenta background with lines of code similar to those of the green Memoji card. In addition to SwiftUI for AR/VR apps that we suspect to be implied by the green Memoji card, it is likely the magenta Memoji card is an ode to Apple’s continued roll-out of developer frameworks and APIs in recent years. These include Metal and Reality Composer, which are APIs and creative tools aimed at assisting the build-out of immersive 3D experiences on Apple devices. The company could potentially be hinting at the debut of additional developer tools aimed at assisting the build-out of nascent AR/VR apps before the Apple mixed-reality headsets hit the shelves later this year or next year.
• Purple: The Memoji, which looks like is wearing shades, is paired with a background that imitates a connected web. This card could be a critical hint at the potential debut of Apple’s upcoming AR/VR device, which seeks to catapult technology-driven connectivity and social experiences into a new era that includes a setting in the virtual world.

The AR-enabled WWDC 2022 teaser is really one of the most interesting we have seen in recent years. It will likely take for the annual keynote event to unfold over the next several days to find out if these Memojis mean “nothing or something.” Nonetheless, the AR-enabled promotional feature does complement well with the suspense building up to the impending launch of the mixed-reality headsets, which Apple has yet to provide any official comments on.

The Virtual Reality Opportunity

Apple, known as the pioneer of disruptive consumer electronics and devices (cue the iPhone…and iPod for millennials), is well-positioned to capitalize on favorable growth trends pertaining to AR/VR technology adoption. An official announcement for Apple’s foray in mixed reality opportunities, whether sometime this week during WWDC or later this year alongside the iPhone 14 launch, will be a key catalyst for the stock, as the nascent technology continues to draw traction in recent months with increasing talks of the metaverse. Paired with Apple’s massive existing installed base of devices and related service platform users, the company is undoubtedly a key gateway to bringing emerging technologies like AR and VR to the mainstream.

Over the next five years, opportunities pertaining to the metaverse are expected to blossom into an $800 billion market, driven by a combination of software and hardware sales. This makes strong tailwinds for Apple, which does not only stand to capitalize on growing metaverse opportunities through the sale of its impending mixed-reality headsets, but also adjacent revenues pertaining to the usage of related apps, software and service platforms – such as Metal and Reality Composer. The trends also bode favorably for the company’s potential ambitions in ultimately launching AR glasses, which it considers a “larger opportunity.”

Valuation Implications

For now, Apple’s flagship mixed-reality headset is estimated to come off the gates with a sticker price as high as $2,000. It is speculated the company currently anticipates related sales at a rate of “one unit per day per Apple retail store,” which is equivalent to about $365 million in related revenues in the first year based on the company’s map of about 500 retail stores, excluding other sales outlets (e.g., online, sales partners, etc.).

Although the figure starts off relatively nominal compared to Apple’s consolidated revenues, which topped $365 billion in fiscal 2021, it is expected to pick-up rapidly and accelerate towards $30 billion within five years based on historical growth trends observed in new product launches from five years back. Based on the stock’s current forward price-to-sales valuation multiple of 5x to 6x, the preliminary sales projections pertaining to Apple’s foray in mixed reality opportunities alone could boost its consolidated valuation by at least $150 billion. And over time when metaverse trends continue to gain mainstream traction, Apple is expected to generate more than $200 billion in annual revenues from the AR/VR segment, which underscores further upside potential for the stock over the longer-term.

Final Thoughts

Although it is currently uncertain whether an official debut of the AR/VR headsets will make it before WWDC 2022 wraps up Friday, one can at least expect to see a continuation of accompanying software and service debuts similar to AR/VR technologies introduced in preceding years’ keynote events. While the long-term prospects of Apple’s foray in immersive experience technologies are favorable, it is uncertain what the stock’s near-term response might look like, considering the volatile market climate this year. Equities are on the verge of either a landslide decline or steep upshot this week, which depends on coming Friday’s release of May CPI data, coinciding with the wrap-up of WWDC 2022.

Apple has been one of the better-performing mega-cap stocks this year compared to benchmark indexes. But it is still underperforming the S&P 500 this year, even after its close-to-6% rally in the past two weeks, which is a sharp contrast to its short stint of being the “single member of the [FAANG] group that is still “outperforming” the index as of late April. Based on observations by Morgan Stanley, the stock has consistently underperformed the S&P 500 – in which it has the “biggest influence of any stock in” – by “a median of 100 bps in the week after [WWDC], but outperformed the S&P by 70 bps in the one month following the event.”

We do not think there will be an exception to the recurring historical trend this time around either, as markets have reacted violently to the 50-bps rate hike in May, although it was largely expected. Volatility stemming from the release of CPI data coming Friday following the wrap-up of WWDC 2022 will likely fuel the recurring trend of post-conference declines, as investors mull on whether the Fed will “amp up the hawk” to tame inflation with further policy tightening or continue with the previously planned rate hikes in half-point increments coming June and July should the economy shows signs of softening through May’s consumer prices.

Nonetheless, we believe it is still a compelling opportunity to gain exposure to the Apple stock at current levels, and we remain optimistic about our $210 price target set based on Apple’s long-term fundamental prospects and robust balance sheet. We look forward to providing follow-up coverage post-WWDC to include a deeper dive into other new product launches and their respective implications on the company’s longer-term performance from both a fundamental and valuation perspective next week.