Apple’s ambitions have reached the shores of augmented reality

Key points in this equity note:

• Apple has launched an expensive mixed-reality headset called Vision Pro going up against Meta which is dominating the market for AR/VR headsets.
  
  
• Several analysts predict that the Vision Pro can become a $50bn annual business within the next 5-10 years adding substantially to Apple’s cash flow generation. The market seems a bit more muted with Apple shares down yesterday after the announcement and down again 0.5% in pre-market trading.
  
  
• Product reviews and industry-related people all talk about a high-quality headset that has leapfrogged Meta’s Quest Pro and Quest 2 products and that demos were flawless.

Investors are undecided about Vision Pro

Apple announced last night (see all WWDC23 highlights here) its first major new product since 2015, when the company introduced its Apple Watch, with the announcement of a mixed-reality headset called Vision Pro. The headset can easily be switched between fully-immersed virtual reality mode and augmented reality where the person will be able to see the surroundings. The headset comes with a hefty price tag of $3,499 and Disney as one of its first big partners on the content side with Disney+ being available in the headset.

As Apple has become a $385bn business the company is increasingly in a position where new product launches must have large revenue potential to move the needle on the valuation and be worthy of Apple’s attention. Apple Watch, which was launched in 2015, has grown to an estimated $14-18bn annual business, had high aspirations but while the category is a big success in its own right it surely not what Apple had hoped. Apple Watch is surely not what has catapulted the company to the crown of public equity markets since 2015 measured on market value but instead its powerful Services segment entailing Apple Cloud, Apple TV, Apple App Store, Apple Music, Apple Arcade, and Apple Fitness+.

Apple CEO Tim Cook said at the presentation that “Today marks the beginning of a new era for computing” and analysts were quick to float the Vision Pro revenue potential to around 10% of revenue over the next 5-10 years. This would constitute a $50bn business over time and around $15-20bn in cash flow from operations and thus a meaningful addition to Apple’s overall cash flow generation. The Vision Pro headset also comes with its own VisionOS operating system which is designed for spatial application including direct support for Unity’s game engine software.

It is clear from the market’s reaction that it has difficulties pricing this opportunity. The initial price reaction was positive but ended the session lower and is down another 0.5% in pre-market trading today. Disney’s share price is up 0.3% in pre-market after being up 1.5% yesterday after the announcement. The biggest gainer is Unity up 17% yesterday and another 5% in pre-market as the Vision Pro might potentially create an entire new business line for Unity. Overall, the conclusion seems to be from the market that it is in a wait-and-see mode, at least for Apple shares.