Apple Results Reinforce Importance of AR
Apple reported Mar-17 quarterly results below Wall Street – and Loup Ventures’ – expectations. Judging by the mild negative reaction of the stock in after-market trading, it appears that investors are focused on the coming iPhone X product cycle and beyond. We agree with the market that a bet on shares of AAPL is a bet on the company’s ability to transition from their existing iPhone platform to an augmented reality-driven platform in the future. Underlying this transition is the Services business, which was solid in Mar-17 ($7.0B vs. our estimate of $7.1B) despite lower-than-expected iPhone units (50.8m units vs. our estimate of 54.8m). This shows Services revenue has resilience in the face of relatively soft iPhone growth.
The Beginning of the Transition to AR-Driven Computing. Tim Cook attributed the “pause” in iPhone sales to earlier and more prevalent rumors of future iPhones, but we see something bigger going on. Every 10-15 years we’ve seen a shift in the dominant computing platform: from the PC in the 80s, to the internet in the 90s, to the smartphone in the mid-2000s. And we think we are in the early stages of the next big shift – to augmented reality-driven computing. In short, wearables and other AR-devices will eventually replace the smartphone. Apple’s Mar-17 iPhone growth rates (-1% y/y in Mar-17), and growth rates in the global smartphone market, are slowing; however, we note that channel-adjusted iPhone growth was +1% y/y in Mar-17. Regardless, slowing iPhone growth will compel Apple to accelerate its development of wearables and AR-driven devices to ensure it’s position as a leader in the next dominant computing platform.
Slowing iPhone growth will compel Apple to accelerate its development of wearables and AR-driven devices.
Supply issues aside, the success of AirPods represents an early win for Apple in its exploration of wearables. We expect the company to continue its development of hardware products (e.g., Apple Watch and AirPods) along with the core technologies that will facilitate the emergence of AR-driven computing. We’ve outlined our thesis on why Apple is well positioned to win the jump ball for the next dominant computing platform. And the recent trend in iPhone growth rates only serves to emphasize the importance of this transition for Apple.
Our Thoughts on AAPL. We expect shares of AAPL to move higher in anticipation of announcements at WWDC in June along with growing optimism around the iPhone X this fall. Separately, the Jun-17 quarter has been de-risked with the just-issued conservative guidance. Fast forwarding to the end of the summer, we expect shares of AAPL to be range bound as optimism around the potential of the iPhone X driving 5-10% y/y unit growth will slowly be replaced by anxiety about the iPhone X tail in Mar-18 and Jun-18.