Apple Inc. (AAPL): How Much Does a Better Apple Watch Matter?

Don’t expect the Apple Watch to move the needle on revenues for some time

The Apple Inc. (NASDAQ:AAPL) Watch certainly hasn’t caught fire with the public.

According to a recent report from International Data Corp. (IDC), the device suffered a 55% plunge in shipments in the second quarter. This also appears not to be an outlier. Consider that analysts at JPMorgan Chase & Co. (NYSE:JPM) significantly reduced their fiscal 2016 shipments from 23.5 million to 11.9 million.

So what does this mean for Apple stock? Should investors be worried?

Impact on AAPL Stock

Well, there is really no need for panic. Something to keep in mind is that the deceleration in Apple Watch shipments probably has much to do with consumers who are waiting for the next version. After all, it’s usually the die-hard early adopters that buy the first iteration, right?

But the Apple Watch has definitely been a worthy first try. On the latest AAPL earnings call, CEO Tim Cook noted that the device is the world’s best seller and got the highest satisfaction rating from J.D. Power.

Besides, it looks like there will be two new launches for the Apple Watch during the fall (this is according to KGI Securities analyst Ming-Chi Kuo). One, an update of the current version, will have a faster processor and improved waterproofing, which will likely be features that will get attention. But the next model, Apple Watch 2, may be the most important since it is expected to also have better location capabilities, a barometer and a longer-lasting battery. All of these are critical for any mobile device.

It’s also important to realize that AAPL has recently launched a new version of the Apple Watch OS with new features to improve the UI and speed. It offers more capabilities for health tracking and sharing.

All these investments in the Apple Watch are critical, since the long-term growth opportunity remains compelling. The global shipments for wearables is forecasted to jump from 101.9 million units in 2016 to 213.6 million by 2020 (based on research from IDC). That’s a hefty 20.3% compound annual growth rate.

Granted, this is not all about smartwatches. Wearables also include clothing, bands and eyewear. But IDC forecasts that – by 2020 – about 52.2% of shipments will be smartwatches.

Bottom Line On Apple Watch

In the meantime, the main driver for Apple stock will be the mighty iPhone (about 57% of overall revenues). Even though the category is fairly mature, the company still has been able to innovate and find new ways to gin up demand, as seen with the success of the iPhone SE (especially in emerging markets).

And yes, during the fall AAPL should get a boost from the next version of the iPhone.

Besides, Apple stock remains fairly cheap, trading at 12 times earnings. By comparison, Microsoft Corporation (NASDAQ:MSFT) is at 28, Intel Corporation (NASDAQ:INTC) sports a multiple of 17X and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is trading at 31X.

Yet more importantly, AAPL is not resting on its laurels as the company continues to focus on innovation. In fact, the R&D budget has jumped by a third during the last year.

In other words, it’s a good bet that there will be more than just the Apple Watch to get investors excited.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He also operates BizDeductor, which provides tax services for the self-employed and gig workers of Uber, Lyft & Airbnb. Follow him on Twitter at@ttaulli. 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/2016/08/better-apple-watch-aapl/.

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