Gene Munster Still Loves Apple Inc., PayPal...Not So Much

By Jonathan Kalin

Piper Jaffray analyst Gene Munster weighs in on Apple Inc. AAPL as the company explores Mixed Reality technology and Paypal Holdings Inc PYPL as the digital payment giant struggles to keep the expanding market in check.

Apple Inc.

Munster is bullish on Apple as he reiterates an Overweight rating on the stock with an unchanged price target of $172. Munster believes that Mixed Reality (MR- extension of augmented reality) will be the new "computing paradigm in 10+ years." Mixed reality will be incorporated into the real world through wearables. He expects Apple in the next two years to add Virtual Reality (VR) to the MFi Program (Made for iPhone), making it simpler for third parties to produce VR headsets powered by the iPhone, similar to Samsung's current VR products. Over the next 5-10 years, Munster continues, "Apple [will] release a mixed reality head set with the long term goal (15+ years) of replacing the iPhone."

By adding VR to the Made for iPhone Program, Apple will develop VR software that will become a companion to the iPhone similar to the Apple Watch. Munster, however, does not believe Apple will place an emphasis on developing expensive hardware in order to compete in the early market for VR.

Munster sees the MR market as being crucial to Apple's long term goals. He writes, "Over the next 20 years, the screen as we know it will slowly go away. Given Apple's business in screens (iPhones, iPads and Macs), Apple needs to have leadership in MR to stay relevant long term." VR will be a direct threat to TV, travel and live experiences, while MR will be a direct threat to smartphones, tablets, and computers. Munster expects Apple to forgo development in the VR hardware realm in order to get a head start in the defined MR market. He defines this market in the future to have about 500+ million users.

PayPal Holdings Inc

Munster is bearish on PayPal as available digital payment solutions continue to saturate the marketplace. The analyst maintains an underweight rating on the stock with a price target of $33.

Competition for PayPal is growing as more competitors can securely enable transactions and offer similar functionality to consumers. Visa, MasterCard and American Express are expanding fast checkout options online, while also retaining rewards acceptance. Munster writes that "Android Pay, Apple Pay and Samsung Pay are gaining/will gain traction at point of sale, generating an active user base that will at some point transition to mobile web payments and, eventually, to desktop payments." These engagements will seek to cut out PayPal altogether.

Munster concludes, "Mobile is offering a medium for competitors to acquire users at a relatively low cost and the limited differentiation among digital payment solutions [can] potentially impact PayPal's transaction margins." This expanded market, he writes, brings PayPal's value proposition, relative to its costs, into question.

According to TipRanks.com, which measures analysts' and bloggers' success rate based on how their calls perform, analyst Gene Munster has a yearly average return of 13.8% and a 52% success rate. Munster is ranked #16 out of 3656 analysts.