Apple generates most of its revenue from its iPhone business, but over the years, the company has aggressively tried to expand its hardware product offerings while also doubling down on its services businesses.
The tech titan has enjoyed significant success as it has introduced several new hardware products. Relatively new products like Apple Watch and AirPods have served as the foundation for the company's wearables business -- one that Apple CFO Luca Maestri said on the company's most recent earnings call is "approaching the size of a Fortune 200 company." (That means its revenue is closing in on $15 billion in annual revenue.)
According to respected analyst Ming-Chi Kuo with TF International Securities (via 9to5Mac), Apple is set to introduce yet another new hardware product category next year: augmented reality (AR) glasses.
Let's take a closer look at what Kuo had to say and why investors should care.
Dependent on iPhone
Per Kuo, the AR glasses that Apple is set to introduce next year will rely substantially on a user's iPhone to handle the computational heavy lifting required to deliver a compelling augmented reality experience.
"The analyst says that the AR glasses will essentially act as a display only with the actual computing rendering, internet connectivity and location services coming from the iPhone in the user's pocket," read 9to5Mac's summary of Kuo's report.
So what does this mean for investors?
A "killer app" for new iPhones?
As you might know, Apple makes substantial strides each year in the computing power that it packs into its latest iPhones. One problem that Apple -- as well as other smartphone makers -- look set to face is the reality that many smartphone use cases simply aren't taking full advantage of that improved processing power.
Can the average smartphone user appreciate the large difference in processing power between the A10 Fusion chip found in the iPhone 7 and the A12 Bionic chip found in the iPhone XR in most applications? I think not, as both chips are able to deliver excellent performance in basic tasks like surfing the web, playing mobile games, and watching video.
This phenomenon is likely contributing to the lengthening of smartphone upgrade cycles. It can also serve to diminish the value proposition of the latest premium smartphones relative to lower-cost options.
So what Apple's upcoming AR glasses could do, then, is usher in all new, computationally intensive use cases that benefit greatly from (if not necessitate) newer, more powerful iPhones.
Of course, these AR glasses wouldn't simply be vehicles by which the company encourages both iPhone upgrades as well as up-sell among iPhone buyers. They should also bring in incremental revenue for Apple, too -- although the magnitude of that revenue potential is by no means clear yet.
Beyond the iPhone
At some point, Apple is going to want to decouple future AR glasses from its dependence on the iPhone. The technology to pull that off will be far from trivial, though.
For Apple to enable a good stand-alone user experience, the company is going to need to find a way to pack a substantial amount of processing power into a lightweight, battery-powered device and deliver acceptable battery life while doing so.
There's little doubt in my mind that Apple will eventually crack it, but it might take several generations for that vision to become a reality. When it does, though, the company may be able to successfully boost the selling prices of future AR glasses while at the same time continuing to drive robust unit shipment growth.
Apple is ultimately a computing device company and to continue to thrive, it will need to both advance the state-of-the-art in today's form factors while also keeping an eye toward the future of computing. Time will tell if stand-alone augmented reality devices have a long-term future, but Apple's words and actions have made it quite clear that it believes in augmented reality technology. Next year, we'll get to see the next step in the company's augmented reality ambitions.
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.