Here’s Why the Apple Watch Doesn’t Matter

AAPL stock is a buy, but not because of this smartwatch

Apple Inc. (NASDAQ:AAPL) is one of those stocks that investors think can do no wrong. And given the recent outperformance of AAPL stock and a big event for the Apple Watch that at least wowed Main Street, it’s tempting to give Apple Inc. another pat on the back.

Here's Why the Apple Watch Doesn't Matter aaplBut I have serious concerns that AAPL stock investors are being duped by the Apple Watch hype, and are buying shares for the wrong reasons.

To be clear up front, I like Apple stock. Its dividend yield has shrunk lately as shares have jumped, but CEO Tim Cook has shown a serious commitment to returning capital to shareholders via dividends and stock buybacks. The recent iPhone 6 launch late last year also was a great success, and hints at continued dominance.

Throw in $180 billion in cash and investments and a still-reasonable forward price-to-earnings of about 13.8 despite all time highs for AAPL stock, and there’s not a super-compelling bear case to be had beyond the risk of a sentiment shift in such a highflier after its roughly 70% run in the past year.

But the Apple Watch? Please … it’s not even part of the equation when you consider whether Apple stock is a buy or a sell.

An iPhone This Is Not

Investors should know by now that iPhone sales are really the only thing that matter to Apple. Consider the latest quarterly filing that showed iPhone sales accounted for almost 70% of total revenue on the quarter! If that’s not impressive enough, the raw number for iPhone sales was about $51.2 billion.

apple sales aapl

Next in line is the steadily slowing iPad, which racked up just about $9 billion in sales for a roughly 12% share of the quarter’s $74.6 billion in total revenue.

While some estimate Apple could sell as many as 20 million of these new smartwatches after launch, the typical Apple Watch will sell between $349 and $599. There are luxury models made out of platinum or gold that cost thousands of dollars, of course, but these obviously are not the typical product. So at 20 million units that some are predicting, that’s about $7 billion to $12 billion in total sales.

Nice, but certainly not a life-changing bump.

And of course, let’s not pretend that the upgrade cycle is the same for watches as it is for smartphones. The iPad has been severely challenged as consumers buy a tablet then sit on it for years rather than steadily upgrade, and it’s natural to think that the same initial pop and slow fade seen by the Apple iPad could be in store for the Apple Watch.

So in a nutshell, you’re talking about a 10% to 15% bump in revenue if everything goes exceedingly well. And while the margins might be nicer on the Apple Watch than on the iPad, that’s not necessarily going to burn the house down.

I’ll admit that it’s nice to see Apple innovating and forging ahead. And I’ll also admit that some features of the Apple Watch look pretty enticing and will have big appeal with tech junkies.

But investors banking on the Apple Watch establishing a new revenue stream that surpasses the iPhone are fooling themselves. It’s still all about the iPhone for AAPL stock, and will remain so for the foreseeable future.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/apple-watch-aapl-stock/.

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