Wamsi Mohan, Bank of America senior IT hardware analyst, joins Yahoo Finance Live to discuss how Apple is staying innovative with their product lines.

Video Transcript

JULIE HYMAN: We saw Apple shares rally on Friday. They continued that move upward in today's session on basically relief after their company's earnings report. Let's bring in Wamsi Mohan, a senior IT hardware analyst at Bank of America. Thanks for being here.

So what's interesting to me is that, for a long time, there was this narrative around Apple that they had to come out with something new. And yet I think, quarter after quarter, they show such strength and growth in their core products that continue to do well and services that it's not necessarily as necessary. What are we gonna see from Apple next? Is it gonna be more of that narrative? Or is there gonna be something new and exciting?

WAMSI MOHAN: Hey, Julie, good morning. Thanks for having me. I think that there's a lot to parse on what you just said right. I mean, people are looking at Apple through a lens of there isn't a lot of innovation. It's the same old products that are continuing to drive year-over-year revenue growth in categories that feel saturated.

But I would take some exception to that and say, really, they have been innovating. And that innovation has been coming, really, at the crux of the gut of their devices, right?

When you look at what all Apple has been able to do from a semiconductor perspective-- the M1 chips that they have introduced, the Apple, you know, A12, 13, 14 chips that they have introduced, which are just enormous pieces of silicon technology that are enabling Apple to really leapfrog the competition in this vertical integration process where they're able to generate amazing photography out of it, amazing videography out of it, and just some of these capabilities that are so important to the user. That is where Apple is really innovating.

So I think that the upgrade cycles of each of these products is coming through the guts of these products, the innovation, both on the software and hardware level, the AI that's being infused in there. There's a lot that's going on in the existing product line. Your question regarding what should we expect next is more of the same. We really should expect very sophisticated devices that play at the heart of hardware, software, and services integration, for that matter. And we've seen some of that in many products that they have launched, like wearables, for example.

And I think you're gonna see more and more of that. You're gonna see augmented reality in particular, where Apple has had a huge focus on. I think that's going to be a very big market for Apple down the road. We view augmented reality glasses as, frankly, a driver, even for an upgrade cycle on the phone.

So, when I put a lens of sort of what are the future products that are going to matter in the near term, I think augmented reality more so than virtual reality. And, down the road if there is a car or not, an autonomous in their efforts down there, I think it's too early to say. But I think augmented reality is going to be the next, most exciting thing that the company is going to launch. And that's probably within the next two years that we're gonna see a lot more about it. We've seen-- we've followed patents, and there's been just a whole host of those that Apple has filed, which have to do very specifically with this technology.

BRIAN SOZZI: It all sounds very exciting, Wamsi. But do you think augmented reality glasses are a mass market product? With the iPhone, we all need to stay connected. Do we need glasses like this?

WAMSI MOHAN: Yeah, no, it's a great question, Brian. And, look, I mean, I think that new products like this take time from an adoption standpoint. Apple typically does not bring products to market before they're really user-friendly. And the UI, the interface, the seamlessness, the connectivity with their other products, the information overlay, all these are very, very important.

So, when you think about something like AR glasses, the transparency of the glasses, the, you know, how well can you see the outside world at the same time, being able to focus on certain electronics, how responsible is this product, all these are going to be crucial for the success of the product.

Now, Apple has had products, like the watch, for instance, it was originally tethered to the phone, the AirPods, which were, you know, deemed very funny-looking device that people sort of made fun of. And it took time, but just the user interface of them just made them extremely popular and successful. There are a billion iPhones out there. Are there going to be a billion glasses? No, of course not.

But-- not in the near term. But I think that these things start small in scale. And then, depending on the utility that they bring and the success that they bring with it, then option rates start to increase. And Apple has historically had, on this wearables category in particular, a focus where they want to let pricing not be a hindrance to adoption. And that really helps.

When you price a product in that sort of between call it $300 to $500 range, and it starts to generate enough appeal. And then, you go generation by generation where you're lowering the price of the older generation and maintaining the price of new generations with new feature functionality, that's been a time tried and tested. So the strategy at Apple-- and they've done phenomenally well with that.

So is it going to be mass market? Not immediately. But I think that it has a lot of relevance and a lot of utility.

Think about, you know, people walking on the streets of New York, holding a phone up, trying to get directions to get to the coffee shop or their next meeting or whatever it be. And I think that it's actually unsafe. We all watch people sort of step under traffic, unfortunately. And it's scary to do that.

Augmented reality glasses would be a way in which it would prevent that, right? you could get an overlay of directions, and it would work well with your AirPods that's telling you the directions. But you could watch that on your glasses. So there's a lot of utility factor.

And, by the way, augmented reality is not a new thing for Apple. They introduced this at their worldwide developer conference a long time ago as ARKit. And the sophistication of those apps is only increasing over time. They just have not had the perfect physical device to go along with it, which I think is on the way.

JULIE HYMAN: I'm picturing people walking around New York City with glasses and AirPods on. And it's a funny picture, maybe not an unrealistic one, but it is a funny one. Wamsi, finally, I just wanted to ask you about the general movement that we've seen in technology going into those Apple earnings on Friday. It's been lower, obviously. And so I wonder in your mind, and in your coverage universe, how much the fundamentals of even a giant like Apple are going to be outweighed by the outlook for rising rates and concerns over compressed multiples.

WAMSI MOHAN: No, it's a great question. And I think that tech investors are really struggling to find names that are likely to play out in this rising rate environment, right? And tech, historically, has been a area of growth.

Now, within my coverage universe, I would say, you know, we really like Apple, obviously. But we also like other companies like IBM, like Seagate technologies, like Dell. And all these companies have, really, very good cash flows. That safety in cash flows is very important at a time like this.

When you look at the volatility that comes from companies that are not generating any cash, and all that future earnings potential is dependent on growth that is coming down the road in, you know, five years, 10 years, these are companies that are not throwing off any cash flow.

And, frankly, when rates go up, the valuation multiples really don't have a very good floor that you can stand by and say, well, this is the absolute lowest level the stock's gonna go to, whereas, with companies that I just mentioned, like IBM and Seagate, IBM's gonna be throwing off between 10 and $11 billion of free cash flow annually in the near term. And then, looking out two years, it could be north of $12 billion easily. That gives it some real stability in terms of valuation floor.

The same thing for Seagate technologies-- we think that that's really interesting because the market is really a wall from being one that, of PC drives, that is what it was exposed to a decade ago, to now cloud data centers. And that is a really fast-growing market. The margin structures are improving. The profitability and the cash flow is structurally improving.

And Seagate trades in the teens from a multiple P/E perspective relative to the market, trading closer to 20 times. So you just have a very different set of stocks that investors are going to start to focus on which have cheap valuation relative to the market. But, at the same time, there is that confidence that that valuation-- maybe the cash flows have a 10% plus minus uncertainty. They're definitely not the 50%, 60%, 70% that you are seeing in many of the high-flying stocks that are subjected to this real multiple compression in a rising rate environment.

JULIE HYMAN: Indeed. All right, Wamsi. Thanks for being here. Good to see you. Wamsi Mohan is senior IT hardware analyst at Bank of America.