Apple: Vision Pro Points to the Future of AR, but Won’t Displace the iPhone Just Yet

Apple Stock at a Glance

• Fair Value Estimate: $150
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Apple Update

As expected, Apple’s AAPL Worldwide Developers Conference keynote was highlighted by Apple Vision Pro, the company’s augmented reality headset expected to arrive in early 2024. We maintain our $150 fair value estimate for Apple, as we don’t envision the company selling enough units of these devices to move the needle on its massive valuation, which is still dominated by the far more pervasive iPhone.

At first glance, we’re impressed with the design and technological capabilities of Vision Pro and its operating system. Yet we didn’t see a “must-have” use case that will lead tens of millions of people to rush out to buy this device, especially given the high price tag ($3,499) and limited battery life (up to two hours when untethered). In our view, some technological constraints, such as battery life and processing power, may prevent Apple and its peers from fully bringing their AR or virtual reality dreams to life right away. In turn, we’re not yet convinced that AR/VR will materially displace PC or smartphone usage just yet.

Apple AR/VR Not Yet a ‘Must-Have’

However, if AR/VR were to encroach on traditional computing use cases, the WWDC announcements give us confidence that Apple won’t be left behind. In an AR/VR landscape with rising competition over the next decade, we expect Apple to be a leader, thanks to its expertise in hardware, software, services, and semiconductors, all of which were on display at WWDC. Vision Pro will be aided by having pre-existing apps available on the device on Day 1. While the “must-have” use case for AR/VR headsets might not exist today, if it arrives, we think it’s quite likely that it will originate on Apple’s Vision Pro platform, given Apple’s internal capabilities and potent developer network.

In terms of valuation, our existing model assumes $1.3 billion of revenue coming from an AR headset in fiscal 2024. We now think that revenue will come in even lower than that, since the device might not arrive until “early 2024,” thus missing the holiday season and also Chinese New Year since the device will first come to the U.S. Most companies would love to launch a billion-dollar business, but such revenue would be a rounding error to our $400 billion-plus estimate for Apple’s fiscal 2024 revenue.

Apple Touts Other Upgrades, AI

Outside of the Vision Pro, WWDC showcased a traditional, yet still impressive, host of improvements across Apple’s products. Our wide moat rating for Apple stems, in part, from its expertise across may key areas of tech—hardware, software, services, and semiconductors. WWDC highlighted advancements in most of these areas, such as a new 15-inch MacBook Air (hardware), the M2 Ultra processor for PCs (semis), iOS 17 (software). We also think Apple again moved the ball forward in user-interface enhancements, such as “Check In” on iOS 17, a feature “for when a user wants to notify a family member or friend that they have made it to their destination safely.”

Finally, in a running theme across technology, we were not surprised to hear Apple tout its usage of artificial intelligence, such as its transformer models (used in large language models) to power the keyboard autocorrect function, among other uses. Apple has long incorporated AI into its products to improve efficiency and the user experience, and we view Apple’s usage as reasonable and similar to what we expect to see from other software companies in the years ahead.