Tim Cook has seen the future, and he is excited.  As the iPhone looks for the next big thing to differentiate itself from the competition, unveiling new products in September, Apple’s “usually calm and cool CEO” is visibly enthused about augmented reality (AR), 3D sensing and providing users a completely different experience using technology. For Apple, the investments they are making in the technology, including facial recognition, could put them two years ahead of Samsung, according to a Deutsche Bank report.

Apple

Only 18% of Apple iPhone users expected to pay over $1,000 for new phone

Samsung has been nipping at the heels of Apple for some time, with analysts noting that the one-time vanguard of phone sophistication no longer has a significant point of differentiation to defend its “moat.”

Barclays’ Mark Moskowitz says that the Samsung Galaxy Note 8 is closing the technical gap, leaving Apple devotees little reason to spend near $1,000 for a phone they can get at a much lower price. According to Barclays analysis, only 18% of buyers they surveyed were willing to pay $1,000 for a phone.

The September launch of new iPhones is expected to have a significant impact on Apple’s near term future. “While the device itself seems more evolutionary than revolutionary, we believe this launch represents the return of staunch competition into the premium segment ($700+ ASP) of the smartphone market following Samsung’s Note 7 debacle last year,” Moskowitz wrote.

But for Apple and the computer industry in general, augmented reality could change everything.

Apple

AR is the next big thing

Deutsche Bank expects a “massive” $14 billion market to be created for 3D sensing hardware firms by 2020, one that “barely exists today.”

Apple is uniquely positioned in the space because they are developing software in-house. Samsung, meanwhile, is relying on third party vendors to engage in the product research and development. “We believe Apple’s selection of structured light for 3D sensing in the iPhone 8 will lead to wide adoption of this approach by many high-end smartphone vendors,” Deutsche Bank wrote in a September 7 report titled “AR: The next big thing.”

The technology is used not only to display information from a unique perspective, but also for security. Apple plans to use facial recognition to validate its phone’s security, with facial recognition expected to be used as a method to streamline a host of financial transactions.

From Deutsche Bank’s perspective, this puts it ahead of the crowd. “We believe Apple’s selection of structured light for 3D sensing in the iPhone 8 will lead to wide adoption of this approach by many high-end smartphone vendors,” they wrote. This could provide Apple a two years head start over Android.  “Much will depend in our view on the most popular AR use cases that begin to emerge as well as the maturity of the hardware and software.”

Apple

Deutsche Bank expects Samsung product offering to be “inferior” amid a fast growing market

While “the Android camp is not standing still,” Deutsche Bank expects their product offering to be “inferior” for at least two years as they rely on outside firms to lead the way.

Deutsche Bank estimates that 3D sensing software penetration is expected to grow from 3% in 2017 to 20% in 2018 and as high as 38% by 2020, with the “late stage growth… catapulted by Android.

When considering individual stocks surrounding the AR opportunity, Deutsche Bank likes those that play in the Apple universe. “We prefer those who operate in the Apple camp given the complexities of 3D sensing. Apple is on course to become a >50% customer in 2018E given its likely success in the iPhone 8 and we believe future models too.” Their preferred names in the 3D sensing sector include AG, AIXTRON, Largan, Sunny Optical, Largan and Tong Hsing.