Why Apple's 'AR/VR Opportunity' Gets This Analyst Excited About Cupertino's Growth Prospects

Apple, Inc. AAPL shares weathered the omicron variant-induced sell-off relatively better than other large-cap peers. An analyst at Morgan Stanley said there is more upside to the shares.

The Apple Analyst: Morgan Stanley analyst Katy Huberty maintained an Overweight rating on Apple shares and increased the price target from $164 to $200.

The Apple Thesis: Apple should benefit from a flight to quality, especially as upside from new product categories gets priced in, Huberty said in a note.

Apple shares invariably do not bake-in the impact from upcoming new product launches, the analyst said. This will change as Apple approaches the launch of an AR/VR product over the next year, she said. 

"Apple is working on products to address two significantly large markets – AR/VR and Autonomous Vehicles – and as we get closer to these products becoming a reality, we believe valuation would need to reflect the optionality of these future opportunities," Huberty said in the note.

The AR/VR opportunity gets Morgan Stanley excited about Apple's future growth, the analyst said. The company has been methodically developing the technology for years, she said. 

"In fact, Apple's AR/VR patent quality ranks among the top of technology vendors today." 

About 35% of respondents prefer to buy an AR/VR device from Apple, significantly ahead of the second-place vendor Alphabet, Inc. GOOGL, Huberty said, citing a recent B2C Harris survey.

Related Link: Apple Analyst: Cupertino's Stock Is Attractive Versus Other Mega Caps Despite Valuation

The real catalyst for mass market AR/VR adoption will come when Apple enters the market, the analyst said. 

Adoption of a standalone AR/VR device, she said, is more comparable to the early days of the iPad given a higher ASP and computing functionality relative to AirPods, for example.

The analyst estimates AR/VR devices will generate about $29 billion in revenue by 2026, which will likely be about three years post-introduction.

There is potential for more Services monetization relative to the iPad as use cases develop beyond gaming and remote servicing and evolve into a whole new way in which the world digitally interacts, Morgan Stanley said.

Citing improving iPhone supply, the firm raised its December quarter iPhone shipment estimates by 3 million to 83 million units and overall revenue estimate by 2% to $122.3 billion. The firm also noted that App store revenues are tracking ahead of expectations.

AAPL Price Action: Apple shares gained 3.54% Tuesday, closing at $171.18. 

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