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Apple’s (NASDAQ:AAPL ) annual Worldwide Developers Conference (“WWDC”) held earlier this month had indirectly confirmed a long slate of product upgrades and debuts coming consumers’ way this fall. From the reimagined MacBook Air and upgraded 13” MacBook Pro, to the string of operating system and software updates, Apple has provided a sneak-peak to what is in store for the next generation of iPhones, Macs, wearables, home devices, and accessories.
Although Apple has made no direct mention of the highly anticipated mixed reality headsets during WWDC, a series of software upgrades have pointed to its impending debut, which is speculated to happen in late 2022 or early 2023. All the elements to ensure a seamlessly interconnected environment between the all-new AR/VR device and Apple’s existing family of products and service offerings are in place and ready to capitalize on growth stemming from the nascent technology’s entry to the mainstream.
The unending roster of new software features and services unveiled during WWDC ’22 also underpins Apple’s massive growth trajectory ahead, bolstered by a strong ecosystem designed to maintain in the everyday settings of its installed base of users. And with continued ramp up and scale of demand for newly launched products and services, greater margin expansion remains in store for Apple’s bottom-line, driving better valuation prospects and shareholder value creation over the longer-term.
Apple's stock is now trading at one of its lowest earnings multiple since the pandemic, falling from more than 30x at its all-time peak earlier this year, to now just slightly above its five-year average of 22.5x. Although the valuation remains expensive (vs. S&P 500 at about 19x) even after the significant discount from this year’s global market selloff, Apple’s continued facilitation of “innovation, collaboration, and creation” amongst developers underscores greater value that it has yet to unlock for both its customers and shareholders, making the stock an attractive long-term investment still at current levels.
WWDC 2022 AR Teaser (Apple, with screengrabs taken by Author)
For those who had followed our previous coverage on Apple would likely be familiar with the above images. Apple had incorporated AR features in its WWDC 2022 teaser this year, with its event promotion page embedded with a secret link to parts and pieces of the annual keynote on new software developments for both developers and customers.
While our previous analysis had attributed the teaser to software updates focused on user privacy, developer APIs targeted at AR/VR developments, and Siri application upgrades, WWDC 2022 revelations had clarified that these were broad-based themes for Apple’s next-generation OS upgrades. Instead of individual developments made for singled-out application in specific devices and services (e.g. AR/VR headsets), the above images represented features that have been further improved for extended application across Apple’s ecosystem, addressing commonly requested demands from both product users and developers:
The amalgamation of privacy features, API developments, and Siri application extensions were found in the iOS 16 update for iPhones, with the need to enhance user experiences taking the center stage of several key new developments:
In addition to iOS 16, Apple has also updated the operating systems for the iPad (iPadOS), Mac (macOS) and Apple Watch (watchOS). While watchOS 9 updates have been previewed to include new health and fitness features as expected, with macOS Ventura enhanced to improve integration with upgrades made across Apple’s ecosystem of products and services (e.g. Universal Control), the biggest overhaul outside of iOS 16 was on iPadOS 16.
Apple has stepped up on the iPad’s compatibility with pro user needs via updates flowing through iPadOS 16. In addition to pro features that many users have been familiar with via other Apple devices, such as “keyboard shortcuts, find-and-replace, duplicate file controls, and customized toolbars”, iPadOS 16 will also support “Stage Manager”.
Stage Manager will enable a multitasking interface to enable “multiple overlapping windows and full external display support” on the iPad, just like the Mac workstations. The updated iPadOS is also equipped with a myriad of collaboration tools, such as supporting features for content sharing across Apple and third-party apps, and “Freeform”. Freeform is a new collaboration whiteboard app that allows iPad users to “see, share, and collaborate all in one place without worrying about layouts and page sizes”, and can be connected with Facetime and Messages to facilitate a virtual workplace in real-time.
In addition to the new features of Apple’s next-generation operating system updates revealed during WWDC 2022, the company has also enhanced its service offerings in recent months through a series of developments across health and fitness, as well as its expanded foray in subscription-based video streaming.
Streaming: Announced earlier this month, Apple TV+ has secured the rights to air “Friday Night Baseball” beginning in July, as well as other exclusive accompanying content such as “Countdown to First Pitch” and “MLB Daily Recap”. And just about two weeks ago, Apple has also secured rights to stream Major League Soccer for the next 10 years on Apple TV+, as well as other exclusive MLS content, under a $250+ million per year deal.
The enhanced sports offerings are also complemented by a step-up in Apple News offerings to accommodate new feature “My Sports”. My Sports allows users to follow their favourite sports leagues to obtain information like scores, schedules and standings in real-time right in the news feed.
The feature can be synced with the Apple TV app across all Apple devices to enable the same seamless ecosystem that the company has been striving to improve over the years. My Sports can also be enhanced with Apple News+ subscription, which offers additional premium sports coverage from local newspapers, all in one place.
Health & Fitness: Apple has been ramping up investments into developing new technology offerings for its wearable products in recent years to address increasing user focus on health and fitness features. The company has introduced the “Sleep App” during WWDC 2022, a highly requested suite of features by Apple Watch users. The Sleep App encompasses offerings such as heart-rate monitoring and sleep stage tracking to generate real-time data on a users’ sleep patterns.
The company has also enhanced its Heart Health offerings, including the introduction of “AFib History”, which keeps track of atrial fibrillation detected through the Apple Watch to help users and health providers pinpoint certain heart issues. The embedded feature in the Apple Watch has also been FDA approved after a study showed 98% accuracy, a significant milestone in verifying the device’s ability in saving lives.
Apple has also introduced “Medications”, an app that allows Apple Watch users to track medication records, enable reminders to take medication, and log daily intakes. The app also features drug interaction warnings, providing information to users about certain side effects of drug intake logged through the app.
All of the above information generated from Apple’s newest health and fitness offerings can be accessed through the Apple Health App, with enhanced on-device encryption to ensure privacy of user data.
In addition to the flurry of upgrades in its software and line-up of services, Apple has also introduced the reimagined MacBook Air and 13” MacBook Pro fitted with its latest M2 silicon designed in-house. The two new product revelations, alongside the series of software and service announcements during WWDC 2022 have laid breadcrumbs to what is in store for debut later in the year:
Apple's transition to its in-house designed silicon has played a significant role in restoring favourable growth trends in Mac and iPad demand observed in recent quarters. The company had introduced the M1 Ultra chip earlier this year, which powers the Mac Studio desktop, which is currently the “world’s most powerful chip for PC”. It enables 7x faster performance than its predecessor, drawing favourable demand from creative professionals spanning app developers to video creators.
And now, the next-generation M2 silicon is a further step-up, enabling about 20% better overall performance across Apple’s Mac and iPad line-up compared to its predecessor chip. The revamped, M2-equipped MacBook Air, which got its first major overhaul in more than a decade, will deliver up to “40% faster [performance] in handling some pro apps”, underscoring Apple’s aspirations to further penetrate the commercial market with its non-Pro laptops. The M2 chip is also equipped with “an updated video engine to more smoothly play 4K and 8K video”, another core offering to attract pro creative users, and expand the addressable market for its line-up of desktop and laptop workstations.
The M2-equipped MacBook Air and 13” MacBook Pro introduced during WWDC 2022 paves the way for a larger upgrade cycle across Apple’s broader Mac line-up later this year. The developments are foreshadowing the release of a new M2-powered Mac minis, MacBooks, and iMacs, underscoring Apple’s aspirations in furthering its market share in both the retail and commercial PC markets.
With Apple silicon consistently proving quality and performance for the Mac line-up, the company has rapidly rose to the top spot by market share in PC sales this year. Macs represented 18.8% of total PC shipments in the March-quarter, beating long-time industry leader Dell (DELL) and Hewlett Packard (HPE). Close to half of Mac buyers in the March-quarter noted they were new to the product, underscoring Apple's continued market share gains. With floating speculations that the company is already working on the next-generation M3 chip, with its debut to come through the 2023 13” and 15” MacBook Air and iMac models, as well as a potential 12” MacBook still in early development, Apple is well-poised to remain in the top spot for PC sales.
The addition of pro features to the iPad as observed through the device’s latest operating system, as well as anticipated new iPad model launches later this year is also slated to increase Apple’s share gains in the multi-purpose tablet market. Despite declining iPad sales in recent quarters due to supply constraints, Apple led tablet market sales in the March-quarter and grabbed close to 40% of market share, beating rival and runner-up Samsung's 20.4% by wide margins.
Apple’s iPad sales have benefited from heightened demand for portable and convenient computers to facilitate remote working and studying arrangements during the pandemic. And building on this momentum, the growing list of pro features and remote collaboration capabilities offered through the iPad makes it an attractive, low-cost and reliable alternative to Apple’s Mac workstations. The combination of wide-ranging pro performance and price segments across Apple’s Mac and iPad offerings are expected to be a competitive advantage for Apple, which comes at an opportune time to insulate against the softening global consumer PC market.
The release of the iPhone 14 family later this fall is almost a done deal at this point. Many of the newly introduced iOS 16 features are designed to accommodate the upcoming iPhone 14-specific improvements, such as always-on display as discussed in earlier sections.
The iPhone 14 base and pro series, which are estimated to encompass four device models, are expected to roll-out at the same time. The Pro models are expected to feature an upgraded A16 chip, while the base model will feature the A15 chip that powers the current iPhone 13 models. The newest family of iPhones will also feature larger screens, starting with a 6.7” base model – a feature that the revamped iOS 16 customizable lock screens will complement.
The anticipated elimination of the smaller iPhone models appears to be a strategic move as consumer preference has gradually pivoted towards max-sized models in recent years. The change is also expected to cushion some of the impact from slowing consumer spending in China – the max-sized models are particularly popular in region, so offering a more affordable non-Pro option will likely improve Apple's reach into Chinese consumers' wallets. The combination of exterior and software improvements to the upcoming family of iPhone 14 models is expected to help maximize Apple’s global smartphone share gains ahead of the upcoming upgrade cycle, and bolster the segment’s continued strength in driving the bulk of the company’s consolidated sales.
The flurry of new health and fitness apps and services, alongside watchOS 9 updates previewed during WWDC 2022 also suggest what the Series 8 Apple Watches coming later this year will entail. With an increasing focus on health and fitness developments, Apple is expected to release upgrades to the low-end SE and standard Series 8 Apple watches later this year, as well as an all-new “rugged edition aimed at extreme sports”.
The potential release of a heavy-duty smart watch targeting extreme sports athletes is also corroborated by watchOS 9 enhancements discussed earlier. These include new health and fitness-oriented upgrades such as “Multisport” to facilitate automatic tracking between swimming, biking and running, as well as elevation tracking, training and heart-rate zones to monitor workout intensity, and enhanced swim efficiency tracking tailored for professional swimmers.
Improved developments to Siri integration into third-party apps, as well as new connected home features like “Matter” introduced during WWDC 2022 also underscores Apple’s goals of boosting HomePod take-rate in the long-run. Similar to APIs targeting integration of Siri into third-party apps, Matter enables third-party home accessories to connect with Apple’s ecosystem, enabling smart home controls at the palm of the hand via the Home App on iPhone. Paired with anticipated improvements to the “original HomePod in terms of size and audio performance”, Apple’s next-generation smart home device looks to enhance its competition against rivals like Amazon’s Echo and Alexa devices, and Google Home (GOOG / GOOGL). This fares favourably for Apple, as the global market for smart home devices are expected to expand at a compounded annual growth rate of 26% over the next five years, driven by increasing digital transformation and adoption of virtual home assistance devices across households.
Apple’s amped up efforts in expanding its foray in video streaming with notable sports developments also corroborates the launch of a new Apple TV later this year. The company is speculated to be in development of a next-generation Apple TV powered by a higher-performance A14 chip.
The series of software developments, as well as upcoming product upgrades anticipated later in the year underscores tremendous growth prospects for Apple’s wearables, home and accessories segment. Representing a mere 9% of Apple’s consolidated sales as of the latest March-quarter, there is still significant headroom for the segment’s expansion over coming years. With wearables, home and accessories demand bolstered by supporting higher-margin services like Apple TV+ and Fitness+, the expanding product segment and accompanying service sales uniquely positions Apple for further growth and margin expansion over the longer-term, underpinning favourable valuation prospects ahead for the stock still.
While WWDC 2022 has not made any direct references to its upcoming mixed reality headset’s debut, it has dropped some hints about Apple’s aspirations in the realm of AR/VR opportunities, just like previous keynote presentations in recent years. New features flowing through the next-generation operating system upgrades announced during WWDC 2022 underscore developments that will imminently facilitate the integration of AR/VR headsets into Apple’s ecosystem down the road. In addition to immersive experience-oriented tools like Metal and Reality Composer introduced in recent years, Apple’s accelerated development of APIs aimed at improving adoption of hands-free features like Siri and Dictation announced during WWDC 2022 also point to the impending launch of the long-awaited mixed reality headsets.
As mentioned in our previous coverage, Apple’s upcoming launch of the mixed reality headsets will be an exciting development for both Apple product fans, as well as shareholders. Over the next five years, opportunities pertaining to the metaverse are expected to blossom into an $800 billion market, driven by a combination of software and hardware sales. This makes strong tailwinds for Apple, which does not only stand to capitalize on growing metaverse opportunities through the sale of its impending mixed-reality headsets, but also adjacent revenues pertaining to the usage of related apps, software and service platforms – to date, Apple has already built a trove of more than 14,000 APIs running on its proprietary AR/VR frameworks like ARKit and RealityKit, encouraging the development of “AR-focused opportunities” as it enters into the next phase of growth with participation in the nascent but rapidly growing sector. The trends also bode favourably for the company’s potential ambitions in ultimately launching AR glasses, which it considers a “larger opportunity.”
Despite signs of deceleration that come with Apple’s significant scale of operations and a lofty valuation in public markets, the recent developments observed through its keynote presentations underscore a tremendous growth trajectory still. Now trading at 22.5x forward earnings, Apple’s market value has calmed from the heights of more than 30x despite still-strong uptake of its products and services, which continue to scale up to support sustained margin expansion and free cash flow generation.
The current market rout provides a compelling “buy on weakness” opportunity still to gain exposure to upside that Apple's stock is capable of delivering over the longer-run. We remain optimistic on our $210 PT for the stock, set based on Apple’s long-term fundamental prospects and robust balance sheet which have been bolstered by favourable growth trends underpinned by continued innovation.
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