Can you picture Apple (AAPL) stock $230? If not, perhaps some AR glasses can help.
The Cupertino-based iPhone maker, which has already seen its shares rise as high a $194, gaining 12.5% year to date, received a strong endorsement from a prominent Wall Street analyst. Citing the company’s augmented reality (AR) potential, on Tuesday, Wamsi Mohan, research analyst at Bank of America/Merrill Lynch boosted his 12-month price target on the stock to $230, suggesting potential returns on more than 21% from current levels.
Apple stock closed Tuesday at $190.35, down 0.12%. The shares have returned 31% in twelve months, besting all the major averages. And the company’s upcoming product launches and improved services revenue has generated an increased level of confidence in the analyst community. For Mohan, however, not only does the analyst believe Apple could gain $40 more to its trading price, the target is $30 higher to the Street’s consensus forecast.
“We think AR apps will command a price premium,” Mohan wrote in a research note to clients Tuesday. “We reiterate our Buy on strong capital returns, continued strong growth in Services revenues and AR providing yet another competitive advantage.” He thinks Apple’s AR capabilities in could drive both iPhone and App Store sales to the tune of $8 billion in revenue.
Digging deeper into the AR prospects, where Mohan sees potentially $6 billion to $8 billion in additional revenue in the next two year, the analysts believes Apple can generate $1 billion from AR-related apps, while the rest ($5 billion to $7 billion) coming from increased iPhone demand, which he sees as a real possibility as a result of the AR excitement. What’s more, Apple could generate an additional $3 billion in revenue ($11 billion total) if the company were to introduce AR-specific eyewear, noted Mohan.
Last year rumors swirled that Apple was working with optical company Carl Zeiss to create the glasses, which were (then) described as a “light pair of augmented reality/mixed reality glasses.” Apple hasn’t been shy about its interest in the AR industry. “AR can be really great, and we have been and continue to invest a lot in this,” Tim Cook said in a conference last year call with analysts. “We are high on AR for the long run. We think there are great things for customers and a great commercial opportunity.”
Still, how realistic are the AR glasses for Apple? Although the company has yet to comment on the glasses themselves, tech evangelist Robert Scoble, via a Facebook (FB) post noted that Zeiss employee confirmed rumors that both companies "are working on a light pair of augmented reality/mixed reality glasses that may be announced this year.”
To be clear, the reference of “this year” in Scoble’s post was 2017. No such announcement by Apple was ever made. This has, however, sparked new rumors that the glasses could be announced at the company’s September launch event. In which case, Mohan could be spot on in his optimism about Apple’s AR prospects and the stock’s long-term potential.
Meanwhile, from a valuation perspective, Apple stock is priced at just 16 times fiscal 2018 estimates of $11.49 per share, which is three points lower than the S&P 500 index. And when adjusting out the company’s cash stockpile, Apple’s P/E drops to mid-single digits. In other words, it’s easy to see how AAPL stock, which conceivably be already valued today at around $210, could now reach $230 in the next three quarters, if not by year’s end. I don’t need AR glasses to see this as a no-brainer.