Is the Apple Watch Cool Enough?

Casey Research |

  

The investment community has been up in arms over a lack of innovation from Apple (AAPL) . 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 (SNE) , Nike (NKE) , and Samsung (SSNLF) 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.

 

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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.

By Adam J. Crawford,
Analyst
 for Casey Research

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AAPL Apple Inc. 109.90 0.41 0.37 26,527,997
NKE Nike Inc. 50.46 -0.19 -0.38 6,933,279
SNE Sony Corporation 28.06 -0.16 -0.57 952,644

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