Apple briefly reached an all-time high of $184.95, its first all-time high in 17 months, before swiftly reversing course after unveiling its new Pro Vision Virtual Reality headset. Did that mark the top of the market, or could fresh all-time highs be reached?
Pro Vision VR headset
Apple showcased its VR headset, its most significant product launch in 8 years, at the Worldwide Developers Conference (WWDC), in a move that wiped $85 billion from its market value in just 40 minutes.
The headset enables users to interact with digital objects overlaid onto the surrounding environment. What caused the selloff?
Following the showcase video, investors appeared to come away with the message that Apple is targeting businesses and software developers as the core client rather than the mainstream retail market. The expectation is that later product generations will be geared toward mainstream customers.
Secondly, the price at $3499 makes the headset more expensive than the $2500 - $3500 price range that analysts had expected and almost 12 times the cost of Meta’s Quest 2, the biggest selling VR set on the market.
Thirdly, the headset will not be released until next year, and even then, it will only be in the US, at least to begin with, limiting the market further.
What do analysts think?
Reactions from analysts have been mixed. JP Morgan was surprised by the launch price but was won over by the richness of features. The high-end build quality and all-in functionality could support modest initial sales volumes of 100k to 200k in the first year.
Morgan Stanley was more cautious. On the one hand, they said that Apple has proved they have the vision for AR technology. However, analysts at Morgan Stanley also believe that the Vision Pro is not ready for mass consumption, lacking, among other things, a “killer app.”
Uncertainty regarding sales meant that forecasts also vary widely ranging. KGI Securities forecast 200,000 shipments in the first year. Meanwhile, Credit Suisse predicted that Apple could ship over 1 million units in the same period.
However, it’s worth keeping in mind that it is unnecessary to dominate market shipments to become the most prominent player, which is the case with Apple smartphones.
What else is driving Apple higher?
Source: TradingView / FlowBank
In the minutes before the VR launch, the Apple share price rose to $185, marking a 43% rally year to date and a 22% rise across the past 12 months, outperforming both the S&P500 and the Nasdaq100.
Apple’s rise to it's all-time high has not only been a product of optimism ahead of the new product release but was also part of a rally in big tech, which boosted the Nasdaq100 to a 14-month high and the S&P500 to a 10-month high.
A handful of stocks have driven the rally of “the Magnificent Seven,” namely, Tesla, Nvidia, Microsoft, Amazon, Apple, Meta, and Alphabet. Demand for these stocks has surged as investors seek quality stocks and cash cows amid rising recession worries. Expectations that the Fed could be nearing peak rates and the recent AI frenzy have also driven the demand for big tech.
Some strategists are turning more bullish toward tech stocks. Citigroup recently raised its tech to overweight. However, others fear that the run is overdone, with the Nasdaq in overbought territory.
What are the risks for Apple from here?
While there are plenty of reasons to follow in Warren Buffet’s footsteps and buy into Apple. There are, of course, risks as well.
Apple’s premium pricing strategy helps protect its margins. However, it could also limit sales, not just of the VR but also when the new iPhone 15 is released. These new devices could be unaffordable for many customers, particularly in a recessionary climate.
Another significant risk for Apple is the AI race. Apple, which has been viewed as at the breaking edge of technology for decades, is behind Amazon, Microsoft, and Alphabet in developing AI, particularly for Siri. This could prove to be problematic as firms look to integrate AI.
Fundamentals analysis
Given the current economic uncertainty, elevated inflation, rising interest rates, and the possibility of a recession, focusing on financially sound companies could be considered a solid strategy.
Apple’s gross margins grew to 43.3% in fiscal year 2022, up from 38.5% in fiscal year 2017. Operating margins rose to 30.3% from 26.8% in the same period. This shows that Apple is growing its profitability as it increases in size. Additionally, Apple produces a tremendous amount of free cash flow, rising to $111 billion in 2022. Meanwhile, the tech giant repurchased $39 billion worth of stock in the past six months.
According to Market Watch, of the 42 analysts rating Apple, 23 classify Apple as overweight, six as buy, 12 gave it a hold rating, and one as a sell.
Conclusion
Apple’s share price reached a record high ahead of the launch of its VR headset. However, disappointment surrounding a high product price, among other points, pulled the share price lower.
The rally in Apple was part of a broader move, supported by a search for quality, hopes of a peak Fed rate, and the AI drive, which could still have more legs to run. However, the overbought stance on the Nasdaq warrants caution.
Strong margins, free cash flow, and share buybacks paint the picture of a financially sound company, which stands it in good stead for fresh all-time highs. However, its premium pricing strategy and slow start into AI could weigh on the share price in the future.
