Piper's Munster Highlights Long-Term Growth Opportunities for Apple (AAPL) Beyond Current iPhone 'Super-Cycle'

August 19, 2016 8:00 AM EDT
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Piper Jaffray affirms Apple (Nasdaq: AAPL) at Overweight with a price target of $151, offering up expected near-term and longer-term growth drivers for the company in terms of hardware and software innovation.

Analyst Gene Munster commented today: Our core thesis on AAPL remains that investors should own the stock for two shots on goal over the next year. First, there is a small chance the iPhone 7 surprises positively and drives growth above levels of the iPhone 6 cycle. Second, and more likely, in our view, the iPhone 7 is incremental as expected and the iPhone 7S/8 (10th anniversary device) is a more meaningful update with a large pool of 2-3 year old device owners for upgrade, creating a "super-cycle." Beyond the super-cycle, we believe there are four categories to consider for innovation over the next 10 years: phone evolution, augmented reality, virtual reality, and the car.

On the iPhone evolution: We believe that in the next three years, the area where Apple can make the most impactful improvement is in battery life. While batteries aren't as exciting technologically as retina scanning or curved glass, we believe that functional improvements tend to drive the most consumer excitement and interest.

Beyond battery, we believe that Apple will likely experiment with curved glass devices. We note that some investors have talked about a hybrid phone/tablet type device delivered through a foldable OLED screen (similar to a device many believe Samsung is working on); however, we note that Apple has been slow to enter into hybrid type devices in the past. For example, the company did not offer a connected keyboard for the iPad to create something closer to a tablet/laptop hybrid until it launched the iPad Pro almost three years after Microsoft introduced the Surface.

Munster on AR: We remain believers that augmented (or mixed) reality devices are the future of screens, but expect the current combination of smartphones, PCs, tablets, and TVs to remain the standard for the next several years. More specifically, we expect the iPhone, and smartphone in general, to continue to act as a bridge to an augmented world. The popularity of Pokemon Go, while a simple example of augmented reality, shows.

While we don't expect ARrelated features to drive an inflection in iPhone growth, we do see them as an important evolution in the device as we move beyond the smartphone. Long-term (beginning more meaningfully in 5-10 years), we continue to expect that some form of wearable, most likely in the form of glasses, will replace the majority of screens in our everyday lives. These wearables, and eventually contact lens or implant-based devices, will likely be the future of augmented reality hardware.

Munster on the Apple car: Initial WSJ reports suggested that the car had a "target ship date" of 2019; however, more recent reports suggest the launch is more likely in 2021 or five years from now. We believe that Apple could release some of its learnings before 2021 as it continues to develop its own car. For example, autonomous driving software could come out earlier via an automotive partner or more advanced CarPlay features. In terms of the market, as we've previously written, BMW might be the best comp for what Apple could do with the car in a wildly successful long-term scenario. BMW brand sold 1.9 million vehicles worldwide in 2015. At a $75k ASP, that would represent a $142.5 billion revenue opportunity. The bottom line is that the car, while it could still be scrapped, has the potential to be a true needle mover.

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