Merrill Lynch takes deep dive into Apple AR, likes what it sees

Envisions a $6 to $8 billion per year opportunity for Apple AR —and that’s without the glasses. Raises price target to $230.

From a 28-page note to clients by Wamsi Mohan et al. that landed in my inbox Tuesday: 

Augmented reality (AR) adoption is set to grow materially with the newly introduced ARKit 2. In our opinion, revenue contribution can be significant even without Apple introducing any dedicated AR hardware. Specifically, we estimate that AR can add $1bn revenue by end of F20 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. We raise our iPhone estimates for F19/F20 by 2mn/8mn units as AR drives incremental iPhone sales.

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 ~$11bn by F20. 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. We reiterate our Buy on strong capital returns, continued strong growth in Services revenues and AR providing yet another competitive advantage…

There are a couple of different 3D sensing technologies that Apple may integrate in the next iteration of the iPhone, that are likely to significantly improve the AR capabilities of the iPhone. One of them is similar to the front facing 3D sensor – or TrueDepth. Current front facing TrueDepth technology is based on projecting a pattern of 30,000 laser dots onto a user’s face and measure the distortion to generate an accurate 3-D image for user authentication.

While TrueDepth is very good at detecting surfaces and details, it is limited to close proximity applications. To utilize room-wide AR applications, Apple will likely integrate a time-of-flight sensor system that is better suited to analyzing surfaces at longer distances from the iPhone. Unlike competitors, Apple designs both the hardware and software of the iPhone. Hence, adding 3D sensing hardware capabilities to the iPhone creates a competitive advantage in the AR smartphone industry, in our view.

ar deep dive

My take: Mohan is the second top-tier-bank analyst in a week I’ve heard singing Apple AR’s praises. They must have seen a helluva demo.

3 Comments

  1. Fred Stein said:

    I love it. Been a fan of AR (NOT VR) for years.

    Simple: First Tim Cook says this and he can spend $M on the best brains to understand the trade-offs. Second, we have billions of flat screens that can provide 3D effects even without 3D/VR gizmos. And flat screens can deliver other flat AR enhancements. Apple’s IB alone has over a billion flat screens.

    Apple can offer 3D image capture from iPhones. LucidCAM offers this today, as 180 degree camera with WiFi only for $399. When? What price?

    Oh yeah, $230 target. That’s cool… and realistic.

    1
    July 10, 2018
  2. Robert Paul Leitao said:

    As the report suggested, Apple has a competitive advantage in AR development because the company designs both the hardware and software for its solutions.

    It’s good to see a Wall Street analyst hone in on the qualitative advantages inherent in the company’s initiatives rather than focusing on unit sales alone. Qualitative advantages provide the company with greater pricing power in the marketplace and attract developers to the company’s robust and increasingly advanced platform of products and services.

    0
    July 11, 2018
  3. Friend of the blog Tim Bajarin writes:

    I agree with Merrill Lynch that AR is a huge deal for Apple with the iPhone and bigger if they do the glasses right.

    But all discussion about Apple’s AR strategy misses a very key point. AR allows Apple to introduce a new user interface to navigating and viewing information.

    What Apple does best is re-invent man-to-machine interfaces. They did this with the Mac with a GUI and mouse, and again with the iPhone and iPad using touch. With Siri they added voice and with AR and glasses they will introduce gestures.

    While gestures are already part of VR, Apple will be the one to bring this gesture UI’s to the masses via AR using the iPhone and AR glasses in the future.

    Creating new man-to-machine interfaces and making them usable and acceptable to a mass audience is in Apple’s DNA. I expect them to be the one to bring gestures as well as enhanced voice navigation to their AR solutions and continue their role in advancing the way people interact with machines.

    0
    July 11, 2018

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