24/7 Wall St.

In a world where smartphone growth has peaked and the market has become saturated and very well established, many investors wonder what the next driver will be for the mighty Apple Inc. (NASDAQ: AAPL). The world’s largest company by market capitalization has been touted by many analysts as having a slew of services, apps and nonproduct revenues coming down the pipe, but now augmented reality (AR) is being pointed out as a new driver.

Merrill Lynch has reiterated its Buy rating on Apple ahead of the company’s earnings report, and the firm’s Wamsi Mohan has raised his price target to $230 from $225 in the call. All-in revenues for AR are called a $6 billion to $8 billion opportunity, and the ARKit 2 and the iOS installed base are being viewed as attractive for AR developers.

There were also some specifics pointed out in revenue opportunities by industry. Mohan pointed out how retailers like Lowes and Home Depot are using AR to help customers visualize how countertops, paint, flooring and blinds look in their homes before buying. Also, AR can be used to market hotels and travel experiences and many other sectors.

Merrill Lynch also raised its 2018 fiscal estimates to $263.7 billion and $11.59 in earnings per share. The new $230 price objective is based on 16 times its 2019 earnings per share (EPS) estimate of $13.98. Thomson Reuters has its annual consensus EPS estimates at $11.49 for 2018 and $13.25 in 2019. The firm also sees higher iPhone sales expectations in 2019 and 2020 as AR drives incremental sales.

Mohan said of Apple:

In our opinion, revenue contribution can be significant even without Apple introducing any dedicated AR hardware. Specifically, we estimate that AR can add $1 billion revenue by the end of Fiscal year 2020 from App Store downloads alone. Moreover, increased use of AR Apps will help drive higher sales of iPhones, especially post rear 3D sensing inclusion in 2019… In addition, if Apple were to introduce AR specific eyewear (not currently factored into our model) we conservatively size the cumulative revenue upside from such device sales at approximately $11 billion by fiscal year 2020. We think AR apps will command a price premium. We believe the inclusion of AR features will be appealing to consumers (for use in applications like Maps that can have an additional virtual overlay) as well as to enterprises where employees can be trained and instructions can be conveyed in real-time.

24/7 Wall St.
7 Big Companies Expected to Beat Earnings

The Merrill Lynch investment rationale for Apple says:

We rate Apple a Buy on potential upside from 1) growth in the services business that will drive higher margins, 2) continued long-term opportunity in emerging markets including China, 3) potential share gains from lower-end iPhones, 4) a steadier iPhone cycles that should drive higher selling prices and gross margins, 5) benefits from tax law changes, and 6) optionality in cash balance, revenue sources like Apple Pay, Apple Watch, home/health kit, etc., that will take time to mature.

Apple shares down fractionally at $190.45 early Tuesday. They have a 52-week range of $144.38 to $194.20, and the consensus analyst target price was seen at $201.07 ahead of this call.