When the iPhone first came out 10 years ago, we all knew it was cool, but never in our wildest dreams did we imagine how dependent we’d become on smartphones and all the apps that would be designed for the gadgets.
Now, here comes the iPhone X and the augmented reality (AR) features it enables. It isn’t obvious yet how we’re going to use AR, but developers are scrambling to develop apps that our future selves won’t be able to live without.
The iPhone X is designed to enable AR apps. It contains Apple’s A11 bionic neural engine chip, which runs machine-learning and artificial-intelligence software, including the facial recognition software used to unlock the phone.
The phone also contains an Apple-created GPU, a graphics processing chip designed for 3D apps and games. Both chips help the phone run more quickly. And last summer, Apple rolled out its ARKit for developers to use in building AR apps for the Apple systems.
Apple appears to be ahead of the pack in AR. According to a 9/12 Business Insider article, “The company is already outpacing its rivals in the industry. Apple announced ARKit earlier this year, which lets developers more easily build augmented reality apps for iPhones, and the community has already grabbed ahold of the technology. A Twitter account documenting the cool apps that developers are creating has had several viral tweets showing off the new tech already. Google recently offered its own AR development kit, called ARCore. [Morgan Stanley analyst Katy] Huberty notes that the tech only works on Pixel and Samsung devices right now, which limits its potential user base.”
Huberty also wrote in a report that in a bullish scenario, AR could add “$404 billion to [her] smartphone device and services revenue forecasts over the next three years,” the Business Insider article reported.
Apple’s presentation on Tuesday included a few examples of the AR programs that will be available on the new phone.
Here’s Jackie’s brief run-down after she watched the action in the Apple presentation (where the augmented reality demonstrations begin at 71 minutes 50 seconds):
(1) AR gaming. Warhammer 40K Freeblade by Pixel Toys is a video game where the animated combatants look like they are in the real world, wherever you point the phone. And Directive Games has produced The Machines, a multiplayer game where players actually feel like they’re in the game.
(2) AR at the ballpark. The MLB At Bat app is being enhanced using Apple’s ARKit. The app will allow users to hold up their phones at a live baseball game and real-time stats and player information will pop up on the screen above the players in the game as they’re playing.
(3) AR in the sky. Fifth Star Lab’s Sky Guide shows constellations superimposed on the actual night sky. In the earlier version, a user pointed the phone at the sky, and an animated sky popped up to show constellations and stars.
(4) AR enlivens emojis. “Anemojis,” or animated emogis, come straight from Apple developers. The phone reads your facial expressions as you say something and gives the expressions and words to an emoji. You can then text the talking/emoting emojis to family and friends. This app may not improve productivity, but it will mean that kids will pester their parents for a $1,000 phone.
Apple shares slid a little on the day of the iPhone X unveiling, but they’re up 38.9% ytd through Tuesday’s close, trouncing the S&P 500’s 11.5% return. The stock’s importance to the market has grown tremendously over the past 13 years. Joe reports that Apple’s market cap makes up 3.9% of the S&P 500’s market capitalization today, up from less than 0.5% in 2004 (Fig. 1). As a result, Apple has boosted the S&P 500’s return by almost a full percentage point so far this year.
The company’s impact on the S&P 500 Tech sector is even more dramatic. The sector is up an amazing 25.9% ytd. Without Apple, the sector would be up roughly 23%. Despite the amazing run, Apple’s shares still trade at reasonable valuations: 17.9 times analysts’ consensus earnings estimate of $9.01 a share in FY2017 and 14.8 times FY2018’s estimate of $10.85. The company’s fiscal year ends 9/30. Those P/Es are both below the company’s 20.4% earnings growth rate forecasted for 2018.
None of the other FAANG (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) stocks carry P/Es that are below their earnings growth rates. Facebook shares sport a P/E of 26.8 on the consensus 2018 earnings estimate, which represents expected earnings growth of 21.9% y/y. Netflix shares trade at 92.1 times 2018’s estimated earnings, which represents growth of 70.3% y/y. Amazon, has the fastest growth and the highest P/E. Its shares trade at 122.1 times the 2018 earnings estimate, which implies growth of 112.4% over the earnings expected for 2017. FAANGs make up 12.1% of the S&P 500’s market cap, almost twice where that figure stood in 2013 (Fig. 2).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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