AAPL Stock: Don’t Be Too Quick to Dismiss the Apple Smartwatch’s Impact

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In the leadup to its launch, some projections had Apple Inc. (AAPL) selling 50 million Apple Watch smartwatches in 2015 alone. While AAPL has been ducking the release of actual numbers, one analyst says the company is on track to sell 7 million in 2015 and 21 million in its first 12 months of being on sale.

AAPL Stock: Don’t Be Too Quick to Dismiss the Apple Smartwatch's Impact

Source: Apple

Assuming it does hit 21 million within its first year, does that make the Apple Watch a success or a disappointment? And more importantly — at least to AAPL investors — how do these numbers bode for Apple stock?

Apple Stock’s Starts

First, some context in terms of AAPL product launches.

The single most important product in Apple’s lineup right now is the iPhone. The company sold around 226 million of them, for a 15.8% global market share in 2015. But in its first 12 months of sales (beginning in the second quarter of 2007), the iPhone sold 5.41 million units. In a worldwide smartphone market that surpassed 40 million, by Q2 2008 the iPhone’s quarterly sales of 1.7 million units gave it a 4.25% market share.

In other words, the iPhone — Apple’s golden goose — didn’t exactly qualify as a smash hit in its first year.

Let’s contrast that with the Apple Watch. We don’t have final 2015 numbers yet, but in 2014 a total of 6.8 million smartwatches were sold globally, by 89 different manufacturers including Kickstarter darling Pebble and AAPL rival Samsung (SSNLF) — which had six different smartwatch models on the market that year. The estimated 4 million Apple Watch sales in its Q2 2015 launch quarter immediately gave AAPL over 75% of the global smartwatch market. If it sells 7 million units in 2015, the Apple Watch will have outperformed the efforts of all 89 competitors combined the year before.

Despite any disappointment from analysts calling for sales of 50 million Apple Watches in 2015, it’s pretty hard to call the Apple Watch a failure given its performance so far.

Strong Margins for AAPL Smartwatches

Another important factor to consider is profit margin. One of the reasons Apple stock has done so well is the volume of iPhone sales, combined with the amazing profit margins AAPL is able to maintain on the devices. The iPhone 6S is estimated to have margins in the 69% range.

However, IHS Technology reported the least expensive Apple Watch has an estimated profit margin of 76% –the highest of any AAPL device the company has examined, including the iPhone.

Apple is also flogging replacement bands for the Apple Watch, and the margins on these accessories can be even higher. For example, the Sport Band that Apple sells for $49 has an estimated 96% profit margin. Add in partnerships like the $1,100+ Apple Watch Hermes and there’s additional room for high-profit, premium pricing in the Apple Watch product line-up.

The Future of AAPL’s Smartwatches

Finally, consider market growth trajectory.

The iPhone has had a tremendous run as consumers switched en masse from “dumb” cell phones to smartphones. Sales of iPhones have continued to grow as people trade up to better models and markets like China and India have come online, and the gobs of revenue earned by the iPhone have done wonders for Apple stock.

However, the smartphone market is maturing. There are few first-time buyers left to win over, smartphones are getting good enough that incremental improvements make yearly upgrades a tougher sell, and cheap smartphones are now good enough that many consumers are happy to skip paying a premium for a flagship device like the iPhone.

Business Insider recently reported on a prediction from Morgan Stanley that AAPL’s iPhone sales will drop for the first time ever in 2016.

The Apple Watch, on the other hand, has a more positive future. IDC is calling for wearables to take off over the next five years, with smartwatches outpacing the overall category to attain 42.8% growth by 2019. The company calls for the Apple Watch to retain a lead, projecting it will move over 45 million units in 2019, for a market share of over 51%. With the Apple Watch requiring an iPhone for full functionality, growing smartwatch sales could actually help AAPL to boost iPhone sales in the future as well.

Even five years from now, those still aren’t iPhone numbers, but with the average Apple Watch price estimated to be in the $425 to $550 range, 45 million would add between $19 billion and $25 billion to AAPL’s annual revenue by 2019, with the potential that the smartwatch sales cycle will still have room to grow.

If the IHS estimate of 76% margin holds, that’s between roughly $14.5 billion and $19 billion in profits attributable to the Apple Watch.

For fiscal 2015, AAPL reported net income of $53.4 billion, so the Apple Watch could be on track to be an important contributor to the company’s bottom line. And that would certainly help Apple stock to weather the storm of softening iPhone sales.

So don’t count out the Apple Watch yet, even if it wasn’t the massive 50 million-selling hit out of the gates many people were expecting.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/apple-watch-apple-stock-aapl/.

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