The stock market's cool response to the launch of Apple's mixed-reality headset left investors pondering what will provide the next push for a rally that has propelled the shares into record territory.
Having hit an all-time peak in the hours leading up to Monday's product event, shares in the iPhone maker slipped 0.8% by the close and eased further as analysts said the eye-popping price of $3,499 for the Vision Pro headset would limit its mass-market appeal. The shares fell 37 cents on Tuesday to close at $179.21.
Morgan Stanley's Erik Woodring is looking to October for the next potential catalyst, when he expects to learn more about initial headset volumes and precise timing of the launch. Much will depend on the development of a "killer app" that takes the new technology "from niche to mainstream," he said in a note.
Given its lofty valuation, Apple needs news to remain positive. After this year's 38% rally, the stock is priced at 28 times profits projected over the next 12 months, according to data compiled by Bloomberg, the highest since early 2022. By contrast, the average multiple in the S&P 500 technology hardware and equipment index is 18 times -- Apple's average over the past decade.
The towering valuation is more a reflection of the firm's balance-sheet strength, with all that means for buybacks and dividends, than it is of immediate growth prospects. Analysts expect sales this year to decline for the first time since 2016. What's enticing investors the most is the longer-term durability of Apple's revenue streams.
"I'm not concerned that it is more expensive than other hardware companies, because those never figured out how to turn a hardware story into a recurring platform business," said Jonathan Curtis, director of portfolio management for Franklin Equity Group.
When it comes to the Vision Pro headset, the company's ability to bring the product to a mass market will be crucial. And according to analysts at D.A. Davidson, there are "important structural challenges" in terms of its adoption by consumers "which could limit the near-term impact on its sales and profitability." They downgraded the stock to neutral from buy after the event.
Angelo Zino, senior equity analyst at CFRA Research, said Apple failed to identify why the headset is a must-own device for consumers, "at least for now." But of course, the muted market reaction doesn't detract from the product's long-term potential and Zino said he was "impressed by its best-in-class hardware/immersive capabilities."
For Kim Forrest, chief investment officer and founder of Bokeh Capital Partners, Apple's valuation hasn't been compelling for years but that hasn't stopped her and a vast majority of other portfolio managers from owning it.
"You buy it because it mints cash, the gravitational pull of it in the index makes you need to own it to keep up with the market," she said. "They reliably, every ten years or so, come out with products we didn't know we needed."
Franklin's Curtis is similarly optimistic. "Growth is going to ebb and flow, and we're currently in an ebbing period, given tough covid comps and maybe a slightly weakening consumer," he said. "However, on a long-term perspective it will eventually flow again."