Apple cut to Neutral at Davidson after unveiling 'most significant new hardware product since iPhone'
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D.A. Davidson downgraded Apple (NASDAQ:AAPL) shares to Neutral from Buy and lowered the price target to $185 from $193.
On Monday, Apple unveiled its mixed-reality headset called Apple Vision Pro along with other products at its annual Worldwide Developers Conference. The company is expected to start selling its (AR/VR) headset in early 2024 for $3,499 through its website (apple.com) and Apple retail stores.
Davidson analysts said that they believe the headset could be Apple's most significant new hardware product since the iPhone in 2007. However, the firm downgraded the shares on its belief that any good news from the AR/VR product launch is already reflected in the share price.
In addition, the analysts think that there are important structural challenges for Apple when it comes to consumers adopting AR/VR hardware, which could limit the near-term impact on its sales and profitability.
The firm believes that Apple's entry into the AR/VR hardware should serve as a catalyst for adoption but structural challenges remain.
The analysts said that they have not seen more meaningful consumer adoption to date of AR/VR hardware because the price points for the products are too high. And Apple's initial pricing of $3,499 does nothing to change this.
While Disney+ is expected to be available when the product is launched, the firm is taking a wait-and-watch approach toward the availability of more content and applications which it believes will be required to make it a more mainstream product.
In addition, the analysts said that Apple was not able to make an AR/VR headset which looks good when worn. The firm also views the two-hour battery life as limiting the product's functionality. Besides, a small number of consumers get motion sickness from AR/VR headsets, which should also impact mass adoption, according to the firm.
All this could be good news for Meta Platforms (META).
Meta is offering an AR/VR headset Meta Quest 2 for $299 and last week announced the Meta Quest 3 for $499, which will release in the fall.
The analysts said that Meta stands to gain from Apple driving consumer adoption and because the Facebook parent offers hardware at much lower prices.
In 2022, Meta generated $2.2B of revenue in its Reality Labs unit, which include AR/VR related content, hardware, and software sales, the firm noted.
The analysts said that their new price target of $185 was based on the firm's updated discounted cashflow model, including its long-term adjusted EBITDA margin outlook of 35.0% (unchanged) versus 30.8% in FY22.
The change reflects an increase in the firm's discount rate (with the 10-Year Treasury Yield at 3.7%) offsetting the modest increase in the firm's near-term sales and profit outlook from the new product launch.
AAPL -2.59% to $178.83 premarket June 6
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