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Citi Managing Director in Equity Research Jim Suva joins Yahoo Finance to discuss the outlook for Apple after it reported record-breaking earnings.
AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Jim Suva, Citi managing director in equity research, specializing in technology. Jim, I'll let you pick here. What's the big headline coming out of the earnings call, given the strength in the quarter?
JIM SUVA: Well, the headline is they crushed it. But when you look forward because the stock market will, it's important to note their March guidance or commentary on the call was very positive. And many were thinking that Apple was a bit of a big COVID beneficiary. And when we get past the pandemic, people will potentially start scaling back their purchasing. And now that we're lapping COVID in the second year, it appears that that fear is unwarranted.
But here's the scary thing. They beat a lot, and imagine if they didn't have the supply constraints. Scary in a good way of how much demand is actually out there for the Apple products, and it's across their portfolios. So we took our numbers materially higher. We have a buy rating with a $200 target price. We like the stock here, and we think that there's a lot of innovation still left to be announced. And they come from Apple.
BRAD SMITH: And Jim, imagine even on top of-- even if they didn't have the supply chain constraints, even if they didn't have to close some of their store locations in some very key markets, I might add, too, selective as they may have been and had to choose to take that decision for the protection of both their employees and their customers, looking through to the retail strategy and how that proved strong, even in spite of some of those closures, going forward from here, where would you say for Apple, the biggest opportunity in continuing to have this cycle repeat itself, where is that opportunity? And where are we at in that cycle?
JIM SUVA: So, Brad, that's a great observation. And I would say that the part of the cycle we should think about is really less of thinking about units and things like that and more thinking about the ecosystem, whether it be consumer, whether it be healthcare, whether it be small and mid-sized businesses. Even my dentist now has Apple products in keeping my dental records on the Apple ecosystem. We think about health. We think about fitness, education, and enterprises. We're seeing Apple have its tentacles reach out more and more.
You know, people store photos in the cloud. That's just the beginning. And in the future, we expect cloud to continue to grow more and more for Apple. And they are known for great privacy and security for people. And we simply see that this ecosystem getting bigger. You know, earlier, Akiko mentioned some potential new products that Tim Cook alluded to. We think Ar and VR are going to be very big for Apple.
Whether it be somebody coming around to redesign the architect or the painting within your house or education or doctors or pilots learning to fly, or even children or people learning how to interact in the Metaverse, there's a great opportunity in AR and VR. Apple may not be the first into areas, but when they go in, their product is really premium and very good to great user experience.
BRAD SMITH: OK, you mentioned the Metaverse. You've summoned that into the chat. So let's play a clip of Tim Cook addressing that very matter in the earnings call.
TIM COOK: We're a company in the business of innovation, so we're always exploring new and emerging technologies. And I've spoken at length about how this area is very interesting to us. Right now, we have over 14,000 AR kit apps in the App Store, which provide incredible AR experiences for millions of people today. And so we see a lot of potential in this space and are investing accordingly.
BRAD SMITH: Now existing as it stands, they've already run into issues with developers, some of the companies that rely on App Store, especially with regard to the amount that Apple is able to take as a result of revenues that are seen or as purchases that are seen. And so with that in mind, how critical is it for them to get these relationships right with those developers, even prior to this massive AR kit and VR kit push in terms of having more development that's going to take place strictly for the Apple Metaverse?
JIM SUVA: Yeah, Brad, great question and very insightful. I would say this. The relationship has many different features to it. You mentioned the amount they charge, whether it be 30% on a one-time purchase or a 15% on a subscription. But more importantly is they want to make sure it works very well for their customers.
Let's say if you're a building architect or a designer. You may be more interested in having that the measurements and the location that goes for the forward-facing cameras to measure appropriately so you buy the right amount of materials. You may be more interested in accuracy. If you're a credit card company, you're more interested in consumer protection and not stealing money or money laundering and fraud.
So Apple typically does a very good customer experience, both on the user and also the enterprise side of things. We expect them to navigate this. It's a delicate thing. It's almost like buying groceries. You know the grocery store marks up your milk. You know they do, but you just hope they don't take advantage of you.
We think that the Apple-added services of security, privacy, and on the Apple ecosystem, it's well documented that the users spend more money than they do on other Android and other systems. And if you're a company who's going out there trying to sell things, you want to go where people are spending the money. And that is simply on the Apple iOS ecosystem.
AKIKO FUJITA: Jim, specifically on the metaverse, where is the opportunity or what's going to be the driver for Apple? Is it on the headset side, or is it on the software side long-term?
JIM SUVA: We actually think it's both. Near term right now, it's on the software side because they've already got, I think it's 14,000 apps and developers that are using it actively right now. So that's kind of already going, but there's a lot more for it. You think about architecture or design, landscaping, homebuilding, education, healthcare, learning, training, this is all new.
And then that doesn't even include the big, big sector of e-gaming and e-sports, where you actually go into the device, you wear certain clothing and avatar personalities, spend money, interact with others. That will be big. But in the next six months, it will be on the software side. And we expect them in the second half of this year to launch hardware.
And the way this year will play out is in June, they have this thing called the Worldwide Developer Conference, acronym WWDC, where we expect there will be a lot of energy and excitement around the software and hardware coming together for a premium experience. And that's where Apple makes its magic, where it comes together with the software and the hardware for a premium experience.