Could the Apple Watch Be a Marketing Flop?

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Rumors broke earlier this week that the high-end version of the Apple Watch—the Edition—would have an 18-karat-gold case and could cost $4,000 or more.  Some rumors have the sales price closer to $10,000, or about on par with an entry-level Rolex.

Could the Apple Watch Be a Marketing Flop?
Source: Apple

This immediately begs the question: Who in their right mind is going to pay Rolex prices for a kitschy piece of wearable tech that will be obsolete in two years?

Seriously. I get the appeal of a high-end watch with a real Swiss movement. It’s classy and old-fashioned…and it’s something a man can pass on to his son or grandson one day. There is something infinitely appealing about that.  But a digital watch that beeps with incoming text messages kinda lacks that timeless appeal.

I’m not a hater of Apple Inc. (NASDAQ:AAPL). In fact, I’m long the stock in my Dividend Growth portfolio, and I was practically gushing about the company’s cash hoard in an article earlier this month. I love AAPL stock and consider it a no-brainer to own in an otherwise overpriced market. But I also think investors need a dose of reality when it comes to the Apple Watch.

The Wall Street Journal reported this week that Apple had asked its suppliers in Asia to make 5-6 million Apple Watches for next quarter’s launch, of which nearly a fifth would be the high-end Edition. We’re talking sales of about 1 million Edition watches per quarter — at anywhere from $4,000 to $10,000 a pop. That’s $4 billion to $10 billion in revenues per quarter — big even by Apple’s gargantuan standards.

As a point of reference, Apple pulled in $74.6 billion in revenue last quarter in the biggest quarter in the company’s history. Adding an extra $4 billion to $10 billion is real money.

But is it realistic?

Probably not, at least past the first quarter or two. I have no doubt that out of the approximately 400 million people that currently own an iPhone, some number of them of will gladly fork over $10,000 for a gold Apple Watch. But 1 million sales per quarter over the course of a year would be 4 million Editions, or about 1% of the entire installed base of iPhone users.

Consider the average iPhone buyer: They are the average American. Most buy a highly-subsidized phone in exchange for a long-term contract with their carrier. Is it really realistic to assume that one out of a hundred of them will spend thousands of dollars on a gold watch?

I have higher hopes for the sport edition of the Apple Watch, which is expected to retail for about $350. But even here, is it realistic to expect sales of 2-3 million per quarter? That would imply that 2%-3% of all iPhone owners buy an Apple Watch every year.

But here is the beauty of it: The Apple Watch doesn’t matter.

If the Apple Watch is a total flop –and I believe there is a decent chance that it will be — it will be a minor bump in the road for Apple.

Think about Apple’s old rival, Microsoft Corporation (NASDAQ:MSFT). Its Windows 8 was a total, unmitigated disaster. It was almost universally hated by users, and its unpopularity allowed Google Inc (NASADAQ:GOOG, NASDAQ:GOOGL) to get a toehold in the desktop and notebook computer markets.

Topping it off, despite billions spent in development and marketing, the Windows Phone has failed to gain traction, and the Surface tablet — while a solid piece of equipment — has a tiny market share compared to the iPad. Yet Microsoft has barely missed a beat. Its Office franchise is as strong as ever, and its cloud services business is booming.

Microsoft thrives because its core businesses are so strong they could survive years of awful management by former CEO Steve Ballmer. Likewise, Apple’s iPhone franchise is so strong, it could easily survive a decade of Ballmer-caliber management and still do just fine.

As I wrote earlier, Apple could fail to earn a profit for the next 10 years and it would still have enough cash to keep its dividend at current levels. And despite Apple’s gargantuan $740 billion market cap, the company is reasonably cheap by standard valuation metrics. Shares trade hands at just 14 times forward earnings estimates, slightly less than the S&P 500 average.

Is there a trade here?

Maybe. If Apple Watch sales come in lower than expected, Wall Street might dump AAPL stock in a short-sighted temper tantrum. Should that happen, use it as a buying opportunity. Apple is a dividend-raising, share repurchasing powerhouse with a bullet-proof balance sheet.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long AAPL and MSFT.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/aapl-could-the-apple-watch-be-a-marketing-flop/.

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