Does Apple Inc. (AAPL) REALLY Have an Apple Watch Problem?

Apple Inc.’s (NASDAQ:AAPL) first major hardware innovation under Tim Cook — the Apple Watch — has remained a conundrum for investors since its launch in April 2015. AAPL has always remained tight-lipped about actual sales numbers for the device, preferring instead to lump it up in the ”Other Products” category. Cook has been touting Apple Watch’s success in rather general and obscure terms under the dubious pretense that revealing that kind of information would play right into the hands of competitors.

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Source: Apple

But this secretive approach has left investors befuddled because they generally hate uncertainty, especially now that iPhone sales are decelerating.

It’s also one of the reasons why AAPL stock has underperformed the broader market. Apple has returned 9.4% this year, versus 10.8% for the S&P 500.

The Apple Watch Is Battered

The general consensus among industry experts is that the Apple Watch hit the ground running, moving as many as 200,000 units per day immediately after its launch.

But sales have since dwindled, and nearly petered out during the last quarter. According to a report by International Data Corporation (IDC), Apple Watch sales tanked a jaw-dropping 71% year-over-year during the third quarter, with unit sales clocking in at 1.1 million vs. 3.9 million over the same period last year.

What was particularly worrying was that Apple did not immediately refute the IDC report, leading AAPL stock holders to speculate that the numbers were indeed in the ballpark.

But Cook finally broke the long silence, reassuring investors that not only was Apple Watch alive and well, but was on course to setting a new sales record during the fourth quarter:

“Sales growth is off the charts. During the first week of holiday shopping, our sell-through of Apple Watch was greater than any week in the product’s history. We’re on track for the best quarter ever.”

But Wall Street is not impressed by Cook’s reassurance, and has lamented that he once again succeeded in concealing more information than he divulged.

For instance, AAPL appears to have based its ”best quarter ever” claim on sell-through numbers only, which is basically the percentage of what was sold by retailers versus what the company sent them. Investors are typically more concerned about what Apple actually sold to retailers during the quarter and how it compares with previous periods.

Apple’s New Products and Services Doing Well

According to the IDC report, non-smart wearables have been able to maintain double-digit growth throughout the year. This suggests that smart wearables like Apple Watch might contain too many features that the average user finds unnecessary. The smart wearables market as a whole posted 52% sales decline during the quarter — a far cry from 26% growth recorded by the non-smart wearables industry over the same period.

IDC concluded the report by saying smart wearables market faced a tough future.

But if absolute Apple Watch sales are as impressive as the sell-through claimed by Apple, then investors have some reason to celebrate because it would imply that the IDC report was a bit alarmist.


It also would mean that Cook’s first major product is not doomed to failure as many feared, and help to reassure jittery investors about the company’s future. AAPL introduced Apple Watch upgrades toward the end of the third quarter, and it appears the market has responded positively. Apple Watch could indeed be making a strong comeback.

But Apple Watch might not be Apple’s only shining beacon.

Apple’s Services segment, of which Apple Music and App Store are a big part, has been doing quite well. The segment posted 26% year-over-year growth during the last quarter with revenue clocking in at $6 billion, making it bigger than the Mac line.

And there are reasons to believe the segment has ample growth runways ahead. Apple has reported impressive growth by both Apple Music and App Store. Apple Music subscribers have hit the 20 million mark, up from 17 million reported in September. This is certainly welcome news coming hot on the heels of another report that rival Spotify had failed to close a deal to buy SoundCloud.

Meanwhile, AAPL has announced that App Store set a new revenue record in the month of November. Although the company does not disclose actual numbers for these two revenue streams, their growth trajectories appear impressive.

Bottom Line for AAPL Stock

With the iPhone facing an uncertain future, Apple investors have turned their attention to non-core revenue streams including Apple Watch and the Services segment. Apple has not offered investors solid numbers to qualify what it terms strong performance by Apple Watch, Apple Music and App Store.

AAPL stock though has responded by climbing 3%, which is a positive sign.

Apple could go on to make much better gains if the iPhone 8 super-cycle kicks in as expected in 2017, and help to solidify the bull case.

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

Article printed from InvestorPlace Media,

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