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Saturday, September 27, 2014

Is Apple Watch a Needle Mover?

By Adam J. Crawford, Analyst

The investment community has been up in arms over a lack of innovation from Apple. After all, the company hasn’t launched a new product line in quite some time… that is, until now. Meet the company’s brand new smart device: Apple Watch. Investors hope the product will send Apple’s stock to new heights. Is that wishful thinking?

Apple brings its new product into a hotly contested space, with the likes of Sony, Nike, and Samsung all offering a competing smartwatch. But there’s a common theme with reviews for these gadgets: not enough features, not enough style. Apple aims to fill this void… and will charge a premium for doing so, of course.


Apple Watch will retail for $349, notably higher than most competing watches. Since Apple is notorious for putting the squeeze on retail margins (it reportedly allows retail as little as 3% on tablets), retailers would likely make 10% on the Apple Watch, placing Apple’s revenue per watch at around $315.

In 2013, Apple sold 150 million iPhones. It would be an extremely tall order to sell that many watches, especially at $350 a pop. So for a base-case scenario, let’s say that 30% of iPhone buyers will purchase an Apple Watch. For a bullish scenario, 50%. And for a bearish scenario, 10%. Using these adoption rates yields the following annual unit sales.

Bear Base Bull
Percent of iPhone Sales 10% 30% 50%
Apple Watch Annual
Units Opportunity (Millions)
15 45 75


At a projected price of $315, we get the following projected revenues.


Bear Base Bull
Apple Watch Sales
as a percent of iPhone Sales
10% 20% 50%
Annual Units
Opportunity (Millions)
15 45 75
Price per Watch $315 $315 $315
Revenue (Billions) $4.7 $14.1 $23.6


Over the past four years, Apple’s profit margin has ranged from 19.2% to 26.7%. Let’s assume a 23% profit margin on the Apple Watch. With shares outstanding of 6 billion and at Apple’s current multiple of 15, here’s our calculation of the impact on share price for each volume scenario.


Bear Base Bull
Revenue(Billions) $4.7 $14.1 $23.6
Profit Margin 23% 23% 23%
Profit (Billions) $1.1 $3.2 $5.4
Shares Outstanding
(Billions)
6 6 6
EPS $0.18 $0.53 $0.90
Multiple 15 15 15
Apple Watch
Share Price
$2.70 $7.95 $13.50


Smartwatches will be a nice addition to Apple’s product line in that they will further institutionalize an already iconic brand. However, in looking at just the annual hardware sales, our projections suggest anywhere from a 3% to a 13% impact on share price. At the low end of the projections, the impact is anemic. At the high end, the impact is significant, but hardly seismic. There may be a host of reasons to buy Apple stock, but the Apple Watch by itself isn’t one of them.

The better investment option is to look at companies that supply Apple; this is one of the things we track at BIG TECH. One Apple chip supplier, Avago Technologies, yielded our subscribers over 100% return in just over 12 months, piggybacking on the rise of the iPhone.

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The article Is Apple Watch a Needle Mover? was originally published at caseyresearch.com.


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