Apple's Q2 Results And The Importance Of Augmented Reality

Reviewing Apple Inc.'s AAPL fiscal year second quarter results, former Apple analyst Gene Munster of Loup Ventures said the company's results reinforce the importance of Augmented Reality.

AR is a technology that turns the environment into a digital interface by placing virtual objects in the real world in real time.

Loup Ventures noted Apple reported results below expectations, with revenues at $52.9 billion and earnings per share at $2.10. Gross margins came right in line with the firm's estimate of 38.9 percent.

Services business raked in revenues of $7 billion, roughly in line with the firm's estimate of $7.1 billion. Underlining the resilience of Services revenue, the firm noted that the solid performance of the business came despite the lower-than-expected iPhone unit shipments, which were at 50.8 million units at an ASP of $655 Vs the firm's estimate of 54.8 million units at an ASP of $660.

Muted Stock Reaction Despite Headline Misses

Pointing to the mild negative stock reaction to the sub-par results, Munster said investors should be focusing 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," Munster said.

Transitioning To AR-driven Computing

Munster attributed the pause in iPhone sales to the onset of the next big shift to AR-driven computing, into wearables and AR-devices, which will eventually replace the smartphone. Supporting the argument, Munster referred to the 1 percent year-over-year drop in iPhone shipments in Apple's fiscal year second quarter and the slowing growth rates in the global smartphone market.

However, "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," he said.

Munster expects Apple to push ahead into AR-driven computing by continuing its development of hardware products such as Apple Watch and Airpods along with the adoption of core technologies.

Whither Goes Apple Stock?

Loup Ventures expects Apple shares to move higher in anticipation of announcements at the Worldwide Developer Conference in June along with growing optimism around the launch of the next iteration of iPhone this fall.

The firm noted the June quarter has been de-risked due to the conservative guidance the company issued ($43.5 billion to $45.5 billion in revenues vs. the firm's estimate of $46.9 billion).

By the end of the summer, Loup Ventures expects Apple shares to be range bound as optimism around the potential of the iPhone X (5-10 percent year-over-year growth) will slowly be replaced by anxiety around the iPhone X tail in the March and June quarters of 2018.

Two Camps Seen Emerging

The firm sees two camps emerging on the Apple story over the next year. The first camp will remain positive on Apple despite little to no iPhone growth over the next few years if Services meets Cook's goal of year-over-year growth in the high teens.

Meanwhile, the second camp will be more pragmatic, wanting to see Apple make a push into AR & auto to set the stage for higher growth over the next decade.

"We remain optimistic that Apple will be a significant player in the shift to AR-driven computing, and potential growth from Apple's car project will represent option value," Munster concluded.

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