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Stock Analyst Update

Apple's HomePod Won't Rock Many Houses Right Away

Apple needed to enter the home wireless speaker space, but we're skeptical that it will immediately vault to the forefront of this market.

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We view the most important announcement from  Apple's (AAPL) Worldwide Developer Conference (WWDC) as the launch of HomePod, Apple's $349 entry into the home wireless speaker space to combat the likes of Sonos and Amazon Echo.

We view  Amazon (AMZN) as having an early mover advantage with a cheaper, popular speaker (over 10 million sold, per CIRP), and we're skeptical that Apple will immediately vault to the forefront of this market. We're concerned about trialability as customers are only starting to bring voice recognition speakers into their homes, and the HomePod is almost double the price of the Echo ($180) and far more expensive than secondary speakers (Echo Dot, priced at $50) for additional rooms or budget buyers.

Further, while the voice recognition wars remain ongoing, we see few signs Siri is far enough ahead of the pack (or, just as likely, behind Alexa, Google Assistant and/or Microsoft's Cortana) to warrant a pricing premium. We should note that Apple was clear about Siri being optimized to handle relatively simpler tasks (alarms, music, some news, and so on) and essentially positioned the HomePod as a smarter audio speaker than Sonos, rather than an Echo equivalent with better audio quality, which we think speaks to Apple entering this market in a position of relative weakness.

Nonetheless, we think Apple needed to enter this market to combat the possible erosion of its narrow economic moat. If iPhone customers rely more and more on the Echo or Google Home in the home, they may prefer platform-agnostic services (say, Spotify rather than Apple Music) and perhaps even hardware (say, a Kindle Fire tablet over an iPad). In turn, Apple's customer switching costs around iOS could be at risk as customers could someday see less of a reason to pay premium prices for future iPhones and related services. While the home speaker market bears watching, we remain comfortable with our narrow moat rating for Apple, and we will maintain our $138 fair value estimate for the firm.

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.