Apple Stock: Vision Pro Could Pose Significant Threat to Profitability (NASDAQ: AAPL ) | Private Equity Weekly

apple(NASDAQ:AAPL) management announced that they coming soon Vision Pro will land in China this year.The company faces major challenges in China, reporting a sharp drop in revenue this area. While the Vision Pro has received a lot of media attention, the device is unlikely to make significant revenue gains anytime soon. On the other hand, building the equipment requires significant R&D investment, which has impacted the company’s profit margins. CNBC reported Material list The Vision Pro sells for $1,542, making it difficult for Apple to lower the price.As mentioned earlier, Apple already faces profit headwinds due to other low-margin businesses such as TV+ in previous article.if Vision Pro’s investment has reached a similar level to its competitor Meta (Mehta) Reality Labs said we may see Apple’s profitability decline significantly in the coming quarters.

We need to look at how some of Apple’s products and services fare poorly when directly competing with other large domestic tech companies. This will show the challenges Apple’s Vision Pro faces in competing with the Meta. Apple has underperformed in the smart speaker space, competing directly with Amazon (AMZN) and Google (GOOG). Despite Apple’s best efforts, its smart speakers have failed to gain meaningful market share. Apple has also failed to show good user growth in its video streaming TV+ area. Google YouTube Music Recently It was announced that the number of subscribers has reached 100 million, and although Apple is ahead, this number is likely to surpass Apple Music.

Since it began reporting data in 2020, Meta reports losses in the real-world lab sector have reached $42 billion. If Apple needed to compete with Meta, it would likely invest similar amounts in this area, which would have a negative impact on profits of more than 15%. Webdush analyst Dan Ives Estimated Apple will sell 1 million Vision Pro units in 2025. This is equivalent to an additional $3.5 billion in revenue for Apple. By 2025, Vision Pro’s revenue contribution will be less than 1% of total revenue and less than 10% of the wearable device field. Apple reports a double-digit annual revenue decline. If adoption doesn’t increase significantly, the Vision Pro segment could become a huge money pit. While the Vision Pro has attracted much attention, Apple’s core business is also facing headwinds due to antitrust issues, declining revenue and challenges in the Chinese market.

Pricing issues

The most concerning aspect of the Vision Pro is its price. The price of $3,499 is out of the reach of most customers. Apple may have decided on this price to show the premium quality of the device. However, Vision Pro’s materials are also quite high. Third-party estimates put the bill of materials per set at $1,542, which is higher than the retail price of the Quest Pro. The Vision Pro’s display has received many praises, including from Mark Zuckerberg, but it costs $228 per eye. Apple is likely to launch a lower-priced version of the device in the coming quarters. But even at a lower price, customers may pay something.

Chart: Apple sales decline in China. source: Company filing

Apple management recently announced that the Vision Pro will be launched in China this year. This should help mitigate declining sales in this important region. However, Chinese consumers have recently begun to shift away from luxury purchases as the economy continues to face new headwinds.Even the luxury brand Gucci announced dramatically drop This is a warning sign for Apple.

I believe mass adoption of these devices won’t start at prices above $1,500, and Apple would need to cut many important features from the Vision Pro to reach that price range.

Apple’s competition with big tech companies

Apple’s previous record in competing head-to-head with other big tech companies has been mixed. I think one of Apple’s biggest recent failures has been its inability to grow its smart speaker market share.Both Amazon and Google have been able to retain their market share Despite the price cut of Apple’s HomePod, the performance of smart speakers and smart home devices is still strong. Even the lower-priced HomePod Mini hasn’t had much impact on Apple’s market share.

Figure: Apple’s recent financial report shows a double-digit decline in the wearable device business. source: Company filing

Apple’s wearables business recently posted a double-digit decline in earnings, on top of an 8% decline in the same period last year. Before the pandemic, in the first quarter of 2020, Apple announced $10 billion in revenue from wearable devices. The field has grown at a compound annual growth rate of less than 5% over the past four years. Apple management at one point touted wearables as the next major revenue driver in the company’s product category. Now, it hopes Vision Pro will be the company’s next big product, but Vision Pro faces a huge challenge from Meta.

Meta goes all-in on its real-life labs. It has invested tens of billions of dollars in this area and gained a huge head start.Discovery Series Accumulated With shipments exceeding 20 million units, Apple will find it difficult to approach this number in the short term. Meta is unlikely to give up its market share easily. If Apple’s market share in this segment remains in the single digits or low double digits, it could increase bearish sentiment on the stock.

The biggest money pit in history

The research and development expenses behind this device cannot be underestimated. Meta reports that since 2020, Reality Labs has incurred cumulative losses of $42 billion. This demonstrates the staggering level of research required to build the device and its ecosystem. Apple may invest similar funds to build its own ecosystem.Apple didn’t detail the cost, but Tim Cook mentioned it Investment scale During product launch.

The product, which holds 5,000 patents, builds on many of Apple’s innovations over the years, from chips to displays and, importantly, artificial intelligence and machine learning.

Investors can also gauge expenses by looking at the significant increase in research and development expenses over the past few years. Apple’s TTM R&D expenses have increased from less than $5 billion in 2014 to $30 billion in the most recent quarter. This has also increased the proportion of R&D in revenue from less than 3% to nearly 8%.

Figure: Increase in research spending over the past decade. source: Y chart

Meta announced that it will continue to invest in Reality Labs in the near future. We can expect Apple to do the same in the coming years. The worst-case scenario for Apple is if the company continues to sell millions of Vision Pro units every year, and it has to invest tens of billions of dollars to build an ecosystem of devices.In this case, it would be difficult for Apple to cancel the project like autonomous driving Project Titan.

Apple faces a similar dilemma in the smart speaker space, where a smaller customer base doesn’t provide a sufficient revenue stream to justify the investment. However, the smart speaker field does not require a large investment from Vision Pro. Apple could monetize the Vision Pro ecosystem like it did with iOS, but it would require a large customer base to recoup the investment.

Apple already faces many headwinds, including slowing revenue, declining sales in China and lawsuits from U.S. and international regulators. If Vision Pro’s customer base and monetization don’t increase significantly, we could see Apple report lower margins, which would have a significant negative impact on sentiment on the stock.

The Benefits of a Bearish Thesis

A counter-argument could be made that the Vision Pro is a huge technological leap that could change the way we compute and interact with our devices. Apple sells nearly 200 million iPhones a year, and if the Vision Pro is successful, we could see massive shipments by 2030. Apple will certainly invest heavily in building the technology and ecosystem around Vision Pro. Prices are also likely to fall as economies of scale are realized in the coming years.

In the past, even though Apple was a latecomer, it was still able to capture huge market share in major devices. If this trend continues, Vision Pro may be able to build decent market share over the next few iterations. Many analysts are very optimistic about Vision Pro’s future. Monetizing the device shouldn’t be an obstacle for Apple, as it already has a large user base through other products.

The jury is still out on where Vision Pro will go, but I believe it will have a big negative impact on margins over the next few years until the user base increases. Competition from Meta needs to be considered as Meta has the social network, resources and technical skills to challenge Apple in this area.

Future stock trajectories

Vision Pro sales are unlikely to drive revenue growth in the coming quarters. Even if Apple can cumulatively sell 10 million Vision Pro units by the end of 2027, net sales will increase by $35 billion, which is only a small part of the iPhone segment. Future iterations are likely to be cheaper, which will also reduce the segment’s revenue contribution. On the other hand, the research cost of this project is likely to be tens of billions of dollars, similar to Meta.

Apple shares are down more than 10% year to date, but when we consider forward price-to-earnings ratios, it’s still more expensive than Meta and Alphabet. As market resistance in China increases, Apple’s future revenue growth expectations are also quite modest.

I believe Apple will continue to have a stagnant or declining revenue base in the coming quarters. This will put pressure on the company’s PE multiple. In the years before the pandemic, Apple’s price-to-earnings ratio rarely exceeded 20. Much of the pandemic’s shock has faded, and Apple doesn’t have any short-term business that could drive revenue and margins higher. On the other hand, segments such as TV+ and Vision Pro require significant resource allocation to build a strong customer base. This should be a big negative for margins in the coming quarters. We could see another 25% correction in Apple stock, which would bring the price-to-earnings ratio back closer to pre-pandemic levels. Any trade to buy Apple stock should be held off until the P/E ratio falls below 20, which is possible if the company continues to show revenue headwinds in the coming quarters.

Chart: Forward price-to-earnings ratios and revenue growth for Apple, Meta and Alphabet. source: Y chart

The coming quarters will be particularly tough for Apple as the company faces regulatory challenges over its highly profitable App Store revenue stream and licensing revenue from Google. Apple has also increased its investment in TV+, which has low profit margins.

Vision Pro shipments will be closely watched by Wall Street. Apple is facing stiff competition from Meta, which is in the lead and fully invested in Reality Labs. Vision Pro shipments may not excite Wall Street in the coming quarters, and the company will need to ramp up R&D investments to build out the ecosystem. This trend will hurt Apple’s margins and earnings per share forecasts over the next few years, making it difficult for the stock to outperform the broader S&P 500.