As smartphone growth has peaked and the market becomes evermore saturated, investors may wonder what the next driver will be for Apple (NASDAQ: AAPL), the world’s largest company by market cap.
Apple has been working for years to cement itself in the services space where it seeks to create an all-encompassing digital ecosystem to supplement its iPhones, iPads, MacBooks, etc.
But now the company is going all-in on an emerging technology—augmented reality (AR)—which could generate billions in new revenue.
Last year, Apple released a software development kit—ARKit—to enable iOS app developers to quickly and more easily build augmented reality applications. Last month, the company announced a new generation of the ARKit, known as ARKit 2, updated for Apple’s upcoming iOS 12 operating system.
Among other improvements, the ARKit 2 enables more realistic rendering, 3D object detection, and multi-user shared experiences.
“We think AR apps will command a price premium,” wrote Wamsi Mohan, a senior equity research analyst at Bank of America Merrill Lynch, in a note to clients on Tuesday. “We reiterate our Buy on strong capital returns, continued strong growth in Services revenues and AR providing yet another competitive advantage.”
Bank of America also raised its price target for the stock to $230, or 21% above today’s prices, and Mohan says that the “revenue opportunity” with AR for Apple is between $6 to $8 billion in additional revenue from now until 2020.
$1 billion alone from that would come from AR apps and the rest would come from increased sales of the 2019 iPhones which are expected to include dedicated 3D sensors on the back of the phone making the devices that much more attractive to people who want to use AR apps on their smartphones.
But if the company introduces AR-specific eyewear, and rumors are that it is already working on Apple AR Glasses, the revenue upside could be far higher.
“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 approximately $11 billion by fiscal year 2020,” Mohan added.
The company already boasts over 1 billion devices equipped for AR apps, something that Mohan believes makes Apple’s iOS a logical and “extremely attractive” option for developers.
Augmented reality is on the cusp of becoming a technology that is all but guaranteed to change our day-to-day lives.
The technology puts virtual objects in the real world by using a smartphone or tablet’s camera enabling users to interact with those objects through their screens. A notable example is Nintendo’s Pokemon Go, a game that took over the world in 2016 by letting users chase and catch Pokemon characters on city streets.
But the technology’s application extends well beyond the gaming space.
Some of the earliest adopters of AR have been in the home furnishings market in which companies like Williams Sonoma (NYSE: WSM), Wayfair (NYSE: W), and Ikea have employed AR applications to help consumers envision furniture and accessories in their homes as a way to boost sales.
AR technology has also been adopted by home repair retailers Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) to show customers how things like new countertops, flooring, and even new paint will look in their homes before they buy. The technology has also been used to market travel experiences and hotels.
With near limitless possibilities for the technology for advertising, retail, and gaming, global spending on AR and virtual reality is expected to jump from $11.4 billion in 2017 to $215 billion by 2021.
Apple CEO Tim Cook said last fall that he sees the technology as profound, “Not today, not the app you’ll see on the App Store today, but what it will be, what it can be, I think it’s profound. And I think Apple is in a really unique position to lead in this area.”
We’ll soon see how this bet in AR pays off for Apple, but odds are good that the technology could be a big driver of revenue growth for the company in the near future.