Apple’s Mixed-Reality Headset Is Still Virtual. Here’s What We May Know About It.

But Wall Street expects Apple’s new device category to be at least a moderate commercial success.

Goldman Sachs

says that it will goose earnings by a low single-digit percentage starting in 2025. BofA Securities predicts an earnings contribution of 36 cents per share by 2026, or about 5% of the consensus estimate—and much more with “meaningful adoption.”

Perhaps I’ve been too dismissive of virtual reality—for example, by comparing the Oculus Quest 2 from

Meta Platforms

(META) to a toddler’s toilet seat mounted to the forehead. I bought the hulking Sony PlayStation VR several years ago to see what the fuss was about. It has provided me with nearly an hour of entertainment, mostly on the first day.

Those two devices are meant to create virtual reality, where users are immersed in a digital world, with the real world blocked out. Augmented reality refers to overlaying digital information on the real world, like in the game Pokémon Go, where players use their phone screens to find virtual cartoon characters in real settings. There have been snags. A Purdue University paper titled “Death By Pokémon Go” found a disproportionate increase in real car crashes near virtual PokeStops.

Mixed reality allows for interaction between the digital and physical worlds. Shoppers can see what new furniture will look like in their homes. Manufacturers can cheaply tinker with factories and machines. Colleagues can meet together as holograms without all that sportscoat-and-Zoom-shorts formality.

Virtual-reality headsets so far have hardly been game-changers—even for gaming. And there are already mixed-reality units like the Magic Leap 1, Google Glass Enterprise 2, and Microsoft HoloLens 2. But Apple might have an edge in virtual reality. It has a vast ecosystem of hardware users and app developers, plus a sprawling retail operation to promote its new wares.

There’s also a sense that Apple waits patiently for others to work out the kinks in their devices, then swoops in with refined products to gradually build a commanding market share. Apple Watch, the company’s last major entrance into a new category, in 2015, was outsold by FitBit at first. Today it makes up some three-quarters of the installed smartwatch base.

Apple hasn’t confirmed headset details, or the launch. That has left the media to rely on patent filings, leaks, rumors of leaks, and leaks of rumors, plus vague management comments. Putting the most reliable/plausible of these together, Goldman predicts that a device called Reality Pro will become available later this fall. It will be lightweight—like ski goggles, The Wall Street Journal has reported—with at least a dozen cameras that can capture facial expressions and body movements, plus lidar for depth sensing. Users will be able to switch between virtual and augmented reality. The device could have displays both inside and out, to show the user’s face to others nearby. And there will be a battery pack attached by a cable to offload weight and heat from the face.

Headset adoption to date has been dominated by gamers. Reality Pro could tie into games and many other Apple ventures. Possibilities, according to Goldman, include immersive concerts, sports, and classes for Apple’s music, TV, and fitness products; interactive city models for maps; and FaceTime calls, photo sharing, and office whiteboarding in virtual reality.

The money won’t be in the hardware. BofA is modeling only 200,000 units sold this year, rising to eight million a year by 2026, once average selling prices have dropped to $800. Operating margins by then are pegged at just 6%. But the ratio of software to hardware revenue is likely to be 2 to 1, and software could have 50% margins, says BofA. It adds that if the headsets are a hit, they could drive an estimated one-third of App Store revenue by 2026.

All of this is much more virtual than reality for now, of course. But Apple could use a bit of buzz. Its suffering shareholders are up only 35% this year, while some members of the artificial intelligentsia have climbed much more—Nvidia (NVDA) is up 163% this year, and Meta Platforms, 114%.

Special goggles might be required to call Apple cheap here. It trades at 29 times projected earnings for calendar 2023, versus 19 times for the broad S&P 500 index. BofA rates it at Neutral. Goldman says Buy, and predicts a rise from a recent $175 to $209 within a year.

Or just buy the new headset and keep it in the plastic, and perhaps it will be a collector’s item in the begoggled future. An original iPhone sold this year for over $63,000, which works out to a yearly return of 33%. If it doesn’t work out, it won’t be the company’s biggest squanderware release. Apple sold a gold watch in 2015 for up to $17,000, and then stopped updating its software in 2018.

Beyond any headset announcement at the Worldwide Developers Conference, Apple is expected to show off updates to its software and new MacBook computers. Phones will have to wait until after the summer, but don’t get your hopes up. “Our checks suggest the next generation of iPhone will have specs largely similar to the iPhone 14,” writes

UBS
.

That’s potentially a problem, because phone sales are already slipping.

Going big on a clunky category where many others have flopped sounds too dumb for Apple, which makes me think that the new Reality Pro, or whatever it’s called, might be real genius. But it’s also possible that Apple is just stretching to find a new hit.

Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.