Why Meta Quest May Outshine Apple Vision Pro In The Near Term

Summary

• Apple Vision Pro, a combination of AR and VR, is set to be released in early next year, but its high price may limit mainstream adoption compared to Meta's more affordable Quest 3.
• The market for AR and VR devices is still in an early stage, bringing uncertainty about scalability and profit generation for investors.
• Meta's Reality Labs' financial performance shows increasing operating losses and higher R&D spending, indicating that achieving profitability in this new industry takes time and patience.

To Studio/iStock via Getty Images

The Debut of "Ski Goggle"

In the WWDC presentation, Apple (NASDAQ:AAPL) unveiled Apple Vision Pro, a new "jaw-dropping" product that has immediately captured significant attention and made headlines on numerous news websites. This announcement marked another milestone to the company. The product will be released in early next year. From a user's perspective, it will revolutionize people's lifestyles, especially in today's decentralized work environment. However, from an investor's perspective, I'm concerned about the product's scalability and long-term value creation for shareholders. Following the news, many investors can't wait to compare this "ski goggle" to Meta (NASDAQ:META)'s Quest 3. My initial thought is that this announcement won't be a catalyst to consistently push the stock higher after a 45% rally YTD. I'll discuss some takeaways based on the announcement.

Apple Website

What is Apple Vision Pro

In a nutshell, Apple Vision Pro is a combination of Augmented Reality (AR) and Virtual Reality (VR) that includes many advanced features, such as HD sounds systems, ultra-high-resolution display, integration with other Apple products, and a video game console. According to the presentation, Apple Vision Pro includes 12 cameras, 5 sensors and 6 microphones, powered by its own M2 chip and new R1 chip. These features significantly enhance the user experience, with each eye enjoying more than 4K resolution imagery. The battery life is expected to be 2 hours, in-line with Quest 2.

Compared to Meta's Quest, I like the idea that Apple Vision Pro minimizes the need for physical tools to maintain its functionalities. For example, rather than relying on redundant dual joystick accessories, the product employs gesturing in midair to control the interface.

In addition, the presentation highlighted a variety of external apps that will be available when it's released. Apps like Disney+ (DIS) and Unity apps (U) saw their stock prices rise after being included in the presentation. I believe Apple will announce more partnerships in the coming months, creating a complete ecosystem for users to fully engage with this new goggle.

Although Apple Vision Pro has a lot of growth potentials, we should keep in mind that the current market for these types of devices is still very limited compared to iPhones. This will bring some uncertainties about how well it will scale and generate profits in the long run, which are the top concerns for investors.

META's Quest 3

Tom's Guide

On June 1st, META announced their next major headset, Quest 3, which is scheduled for release in this fall. The product offers a higher resolution display and better visual quality compared to the previous version. Particularly, this new product will be using the next-generation Snapdragon chipset, which is expected to deliver more than double the graphical performance compared to the previous generation in Quest 2. According to Meta Newsroom, the company is very confident in having the "world's best library of immersive content." Quest 3 will also be compatible with the existing Quest 2 catalog, which includes over 500 VR games, apps, and experiences.

Affordability

No matter how great a product is, I believe affordability is always the biggest priority for customers. AR and VR are still in their early stages, which means the demand for these "elastic" products are very low. I think Apple Vision Pro may struggle to gain traction from the mainstream in a near term. The standalone price of Apple Vision Pro, at $3,500 (or over $3,800 after tax), is 7 times higher than the $500 price of Meta's Quest 3 headset. Moreover, starting from June 4, META reduced the price of Quest 2 to $299.99 for the 128GB SKU and $349.99 for the 256GB SKU. While Apple Vision Pro may offer more power and capabilities than Quest, the pricing difference raises concerns about competition.

Due to its cheaper price, I expect that the mainstream will prefer Quest over Apple Vision Pro. Consequently, unlike Apple's previous products such as iPhone and iPad, I don't see Apple Vision Pro can easily dominate the market due to its high price level. This suggests that it's unlikely to generate profitability and FCF for Apple in the short and mid-term. In the next section, I will examine the financial performance of Meta's Virtual Reality Lab to make a comparison.

META Reality Labs

Company Model

While it may not be appropriate to directly forecast the operating profit of Apple Vision Pro, Meta's Reality Labs can provide some insights that this business will take some time before becoming profitable. Looking at the chart, we can see that Meta's operating loss in the Reality Labs division has been widening due to heavy spendings in capex and research and development. The total loss increased from $4.5 billion in FY2019 to $13.7 billion in FY2022. We should keep in mind that Meta's shareholders are funding the development of this project.

Company Model

Furthermore, regarding the quarterly performance, we can see that the Reality Labs has consistently maintained a significant negative operating margin. It's hard to see any margin expansion in the near term based on its track record. As mentioned earlier, concepts like virtual reality and metaverse are still in the experimental phase and have not gained widespread acceptance in public. Therefore, investors should be cautious and understand that product announcements in these areas may not immediately translate into positive earnings and FCF, which will be discounted by the market participants after the price knee jerk reaction.

Conclusion

In sum, I admit the debut of Apple Vision Pro will significantly enhance user experience and improve people's lives and work, but investors should focus on the product's scalability and long-term value creation. The competition from Meta's Quest 3, which is way more affordable, raises concerns about whether Apple Vision Pro will be widely adopted by the mainstream. While Apple's new product offers more advanced features and user-friendly interface, the huge price gap will give Meta's Quest a comparative advantage.

Looking at Meta's Reality Labs' financial performance, we can see that the company has been facing challenges. They are suffering from increasing operating losses due to higher spending on capex and research and development. We should anticipate that achieving profitability takes time and patience in this industry. Also, it's important to keep in mind that AR and VR are still in an early stage and haven't gained widespread acceptance yet. Therefore, I would be cautiously optimistic because these products won't immediately lead to a positive return on investment for shareholders.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Paul T. Lambert]

Why bother with a fully immersive headset when iPhone users already tend to turn zombie-like when "immersed" in their cell phones while walking down the street and even straight into oncoming traffic? In addition to making people look ridiculous, it's not clear how much additional immersion such goggles can truly offer.

[davepete63]

The author is weirdly convinced that the cheapest product wins. That’s definitely not true for iPhone, iPad and Apple Watch, which capture a majority of their product category profits.

[Johnny Zhang, CFA]

@davepete63 I never said the cheapest product wins. There is a big difference between affordable and cheap. The most affordable product can eventually dominate the mainstream, not just a specific group of users. I hardly see an expensive item can have big market share in the near term if its alternatives are way more affordable. You can’t compare Vision Pro to iPhone because it’s not a “must” for most people right now.

[metoo5]

@Johnny Zhang, CFA - The one consumers deem the best value can eventually dominate profits. Market share is like growth, it is only a good thing under certain conditions.

[Johnny Zhang, CFA]

@metoo5 That’s true. It will eventually come down to affordability. From the company’s perspective, what’s the point if most consumers think it’s a valuable product but can’t afford one?

[Danoxx]

Meta’s is dead. Look at the first eight minutes a new functional and profitable ecosystem has just been created literally out of thin air.

And because this is an investor site, look very closely at what the first generation headset device made by Apple can actually do look very close.

Because of the M2 processor, it is basically a Mac computer with a new Apple designed R1 co-processor, reduced to an even smaller size, the significance is that a large number of existing software programs can be quickly ported over by existing developers on the iPhone, iPad, Apple Watch, and the Mac, and be ready on launch day within the next six months.

www.youtube.com/...

[BigEarn]

@Danoxx Lol. Cook only reiterated the fact that Meta is on the right track with their already number one selling headset and app store. Couple that with 3+billion users and Meta's family of apps. Apple's only recourse is to keep tightening security with the iOS updates, in hopes of slowing down Meta's dominance.

[Danoxx]

@BigEarn Meta and Google will be developing their, spyware for the Vision ecosystem, Tim Cook was being calm, nice and diplomatic as always. The Art of War “ If your enemy is making a mistake do not stop them let them be”

[coolcatnip]

For all the ridicule the Street gave Mark for developing Oculus Quest as not worth the cost and risk for the reward, Tim cook has just validated Zuck's vision and now all is well with 'headsets; ..

[BigEarn]

@coolcatnip Exactly. I just made the same comment to @Danoxx before seeing yours.

[metoo5]

@coolcatnip - The iPhone validated Nokia & Blackberry's market too so not sure that's a strong point. People saying or implying they need the validation of competitors is revealing, no?

[Losingmoneybyinvesting]

@metoo5 Not close to the same

[gordmillar]

I thought this was an interesting launch of a product I did not see working for me. The presentation intrigued me that maybe I could use this in my day to day life - “the Metaverse” is a bit like emojis to me - irrelevant & unnecessary .
Apple is also using shared components from other products , so will hopefully not be seeing the same cost R&D impact as Meta - a good start but will take couple of years and a lower price point to get volumes IMO.

[Steve971]

Some people will buy this new product, even at this crazy price.

In my mind this is a long term bet by apple....in ten years when generation 3/4 comes out, it should be a very compelling high end product.

At this price it presumably covers its materials costs, so they can develop this line at minimal expense (perhaps even break even including R&D?) while Meta develops their line at the expense of shareholders.

I think there is room for both firms here..and both approaches. There are plenty of people who will long term take a cheap product from Meta in return for the firm monetizing their information, and plenty of people who will pay thru the nose for the security/privacy/ecosystem advantages of Apple.

[Danoxx]

@Steve971 Meta’s is done, the hardest decision they will make, is whether or not they support Apple vision concurrently as they go up in flames with their project. First eight minutes, where Marques describes the sensors and talks about the, user interface which is at the next level, note: Apple had to design another OS to control it all.

www.youtube.com/...

[harmjano2]

@Danoxx “Meta is done” - heard that a lot when the share price was as $90…

[Danoxx]

@harmjano2 Meta’s isn’t done, but their new hardware device is done just a matter of when they write it off as a complete loss, and that isn’t the most bitter part, having to design software for Apple‘s Vision Pro is the Actual bitter pill.

[thotdoc]

You missed an alternative way of understanding what Apple has done. Apple is on the road to spatial computing and where that vision will go. If you want to help us investors, immerse yourself in what is spatial computing and where it is going. Lead the narrative rather thsn writing this more traditional article.

[KonaKeoki]

In 1984 I purchased the first Apple Macintosh for $2,500. It had a smaller screen than IBM PCs. It was ONLY black and white. It had only 128K of memory. It had only one 400k disk. And as I recall, it had three, maybe four applications (Write, Paint, MS Excel, and maybe WORD). In today’s dollars, that would be about $7,300. Now, at age 74, I won’t be one of the buyers of the new product (at least not out the gate), but there WILL BE BUYERS. And over time, the headset will shrink, the battery will move on board and weigh next to nothing, and this will be an iPhone level product. Not the first year, and probably not the second or third year, but by 2030…. :-).

[davepete63]

I was also a 1984 Mac purchaser. Eventually every OS looked like a Mac.

[KonaKeoki]

@davepete63 - then you remember - “Windows 95 = Mac 84”. :-)

[VulpineMac]

Certainly the Quest 3 is going to be a short-term success... people THINK they know what AR/VR is all about but Apple is definitely showing the others have no idea. We're talking about a full-fledged, wearable, computer with an M2 chipset vs devices little better than a smartphone. The Quest is little more than a toy by comparison. Sure, the Vision Pro is expensive but not that much more than a higher-end iMac or a low end Mac Studio/Mac Pro. The capabilities appear to be nearly equivalent to the Studio and Pro. The Quest 3 can't compare in power and performance, even though Meta is attempting to compete.

Like other devices before it, the Vision Pro is going to show how XR is supposed to work, while the others continue trying to guess at it.

[Paul Wagner]

Apple products tend to be more expensive than and command a smaller share of market than any individual competitor's products. Even the Iphone has only about 20% of global market and 56% of U.S. market. If past is prologue, this new product will establish a reputation as a superior product that millions of people want badly enough to stretch their budgets to get and that market share, currently zero, will grow to a meaningful if not dominant level.

[VenkatSankar]

META is going to benefit from this free ad campaign triggered by comparison.

[Danoxx]

@VenkatSankar Not in a good way, it’s going to be in a Steve Ballmer bad way.

[big_prop]

Hi Johnny,
Will it work with my iMac?
Regards Graham

[nicholas__t01]

@big_prop did you watch the video? If not, please do.

[tensei]

@big_prop yes the meta quest works with apple products. I have the quest pro and can link to my mac laptop

[Danoxx]

@big_prop It literally is a even smaller Mac with a co-processing friend called R1.

[Yuji__0]

What would people use this Apple product to do? Am not too clear..
Meta goggle at least has lots of games to play with.

[Basit Saliu]

@Yuji__0 Computing, Television Entertainment, Gaming, Video Calls. And it's both AR and VR.

[Blowback2]

@Yuji__0 all iPad games already work with this…..

[nicholas__t01]

@Yuji__0 watch their video

[Mario Silva]

Ask to any Apple's user, if he or she will buy Meta's AR. Apple is not competing with Meta directly, it is clear that Apple is targeting a high-income socioeconomic segment. Knowing how Apple manages its "new products", these glasses will evolve in design and will have a higher range of prices in the future.

[BigEarn]

@Mario Silva My family all have iPhones and we also have Quest 2 VR. I work in IT and most have android phones and Quest 2.

[metoo5]

@BigEarn - "I work in IT and most have android phones"

Most of what user base? I'm in IT in higher ed, and all my dashboards show Apple is dominant with students and faculty, whether Mac or iPhone.

[BigEarn]

@metoo5 Just pointing out most tech professionals tend to buy Android because they see no need to overpay for the status of an iPhone. Makes sense higher ed "students" buy iPhones. It's a status thing. Same reason my kids begged me for iPhones. One in HS and two in college.

[biggdogg]

While I love it, want one and may ultimately buy one, that price tag is a killer and disappoints me as a long term aapl investor

[Basit Saliu]

@biggdogg Interesting enough this could revive the second hand market big time.

[metoo5]

@biggdogg - You're not an early adopter. No reason to be disappointed.

[Basit Saliu]

Apple Vision Pro to AR/VR is like iPad to Tablet computers. There were little zero market or interest until they were launch. Apple is also acknowledging people like me who wear prescription glasses and also colour blind which will make this platform/product line a resounding success in near future. Apple will be the first $10 trillion company (like I said before)

[Danoxx]

@Basit Saliu What that means then is that, by using Seeking Alpha you literally have been tipped off before the crowd, in short, buy more apple shares.

www.youtube.com/... The first eight minutes says it all, and the vision will never cost below $2000 dollars, at least not anytime in the next four years but the good news is, it’s going to replace some of the other devices, if you want it to.

Anyone who wants to buy it, better start saving and investing…….

[Basit Saliu]

R1 SoC, EyeSight, visionOS, and a (likely) dedicated app store in 5 years Vision Pro will have a total monopoly on AR/VR and in distant future Apple will be like the OASIS in Ready Player One.

Note: I apologise if I was a little critical however it because of the price.

[BEI Monaco]

@Basit Saliu i cannot see why Apple would be in a monopolistic situation at all. Just like for the rest of their products, they’ll have a great market share of premium products, but it will never be a winner-takes-all situation.
Meta has the tech for a rival to the reality pro, but they have no interest in releasing such an expensive headset.

[Johnny Zhang, CFA]

@Basit Saliu I agree. In the long run, Apple Vision Pro has the potential to become a dominant player in the market. As this technology scales up and becomes more widely adopted, we can expect the price to decrease.

[Basit Saliu]

@BEI Monaco Before Apple Watch there was Fitbit which was dominating and now Apple Watch have 48% of the smartwatch market share with Samsung and Huawei at a miniscule 8% and 7% respectively with Fitbit nowhere to be found. iPadOS now have 38% of the Tablet market which had zero market or consumer interest until 2010 with Android falling to 48% from 80% before all the Tablet well like Amazon Kindle used only for reading e-books.