How Decoupling Could Save The Apple Watch

Apple Inc. AAPL is trading up around $103 in Wednesday’s session after a successful Q3 earnings report. The sentiment on Wall Street towards the tech company appears to have turned bullish.

Piper Jaffray's Gene Munster, one of the top Apple analysts, joined Wednesday’s edition of PreMarket Prep to discuss the company’s outlook.

Munster noted that Apple’s strong report mostly served as a much-needed reassurance for investors, especially after a bad miss the last time around.

"I think it really symbolizes that the core business is stabilized. It’s been a disappointment over the last three quarters," Munster said, noting the Street's numbers are essentially going to be unchanged after from this report. "One thing we like is that the iPhone franchise is intact, and more importantly that it sets up and gives investors a chance to think a little bit more about the future in terms of how the iPhone 7 will play out, and potentially how the iPhone 8 in 2017 is going to be."

Related Link: Highlights From Gene Munster's Thoughts On Apple Following Earnings

Mac, Watch Concerns

But it wasn't all rosy for Apple. The report did little to assuage investor concern about the Mac and Apple Watch segments.

"The two disappointments were the watch -- about 15 percent below our expectations, and that the overall wearables category was just slow -- and separately the Mac business was a slight disappointment," he said. "[Mac business] was more based on some tough comps and the lack of a new product. They're going to be refreshing most of their products at the end of September, but those are probably the two biggest areas of disappointment."

On the Apple Watch, Munster discussed the last ditch effort that may turn it around.

Decoupling

"There's still one more feature we believe they want to play out in terms of the functionality on the watch, and that's the decoupling of it with the iPhone. The significance of that is you can use your watch without your phone with you. And what we've seen is that people have different screen sizes for different times of the day. If you had a watch that was coupled with some sort of LTE or a radio in it, then that would allow you to do text messages and phone calls from your watch. And I think that their view on the watch is going to be determined by how successful the decoupling of it will be.”

Munster was encouraged by Apple's attention to augmented reality, which he thinks will eventually "cannibalize the iPhone." CEO Tim Cook, who is notoriously secretive when it comes to discussing new projects, talked about the company's investment in augmented reality.

"The hard facts are in 50 years we're not going to have phones: we’re going to have devices that we're going to wear. The big picture is [Apple] put that stake down that they're going to be part of augmented reality, and I think that should give investors some confidence that this company is spending wisely and will have some exciting products and that the Apple story is not over."

Munster, who maintained his bullishness even after last quarter's miss, reiterated his Overweight rating. 

"Just don't overthink it. I think the stock is going to work, and now's the time to be Overweight." 

Catch the full interview with Munster at 9:47 in the clip below. You can listen to PreMarket Prep and chat with our hosts, guests, and listeners LIVE every morning from 8-9:30 a.m. ET, or listen to the podcast on iTunes, Soundcloud, and Stitcher.