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There are two ways to invest in wearable tech. Follow the lead of the avalanche of analyst heavyweights who are currently pumping up Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) stocks with sky-high forecasts for their wearable products.

If you do, be prepared to ignore the reality that Google Glass is still in beta, and there's still a chance (however remote) Apple could whiff on the entire wearables product line.

The alternative is to do the punishingly hard work of thinking for yourself. And then, go for the companies behind the scenes who stand squarely in the middle of the wearable tech trend, and who are also small enough that you might actually net some major gains.

Wearable tech is a huge coming trend, far too important to cover in one article. This segment (Part I) focuses on several reasons tech behemoths' (Google and Apple) needles likely won't even wiggle with wearable tech products in 2014.

Part II suggests alternative companies who are actually selling wearable tech products or components. These companies range from behind-the-scenes NXP Semiconductors (NASDAQ:NXPI), with its rebranded M7 co-processor, to near-monopoly optical giant Luxottica (NYSE:LUX), which has a high-tech smart glass niche product being sold to ski enthusiasts, and fifteen years of research into smart glass technology. And then there's InvenSense (NYSE:INVN), a four-hundred employee company whose fascinating slant to the fabrication of MEMS technology give it a significant unfair advantage in the wearable tech component space.

If you have no interest in Google's or Apple's foray into wearable tech, now's the time to head straight to Part II. But first, let me be clear. Google and Apple are both world-class companies. I'm not advocating selling either company's stock.

Apple has catalysts this year that should get the battered stock off its knees. In a major trend reversal, value-based mutual funds have been buying Apple at a record pace. According to research firm Bernstein, 36% of value based mutual funds with assets over a $1 billion have a position in Apple. That's a 40% increase from a year ago.

Google's recent earnings release showed higher profit in earnings, and the stock is humming along. There weren't any big revelations in the earnings, but Google has a beefy cash pile ($59 billion). I believe Google may have some trouble downstream with Amazon eating into Google's search engine profits. More and more consumers are bypassing Google for purchase searches and going straight to Amazon.

The likelihood is the trend will increase. But that's in the future, and this article focuses on wearable tech sales for Google and Apple in 2014, and the impact that will have on both stocks. The danger for long investors is that the hype bubble in wearable tech could puncture at any time. If sales fail to support the forecasts, the stocks will come back down to earth. With a thump.

A Rung Too Far

Right now, the analyst heavyweights are really skating on thin ice with their projections for wearable tech sales for Apple and Google.

Here are some recent forecasts:

  • According to a Credit Suisse headline: "Wearable Technology Market Set to Explode." (In the article, Credit Suisse projected a 10-fold increase in the market sector to as much as $50 billion in the next three to five years.)
  • Bloomberg's report: "Apples' Planned iWatch Could Be More Profitable Than TV." The article went on to project at least a "$6 billion opportunity" for the iWatch.
  • Morgan Stanley's report: "Apple iWatch Could Spark Sales as High as $17.5 Billion in First Year"
  • IHS forecast: Nearly 10 Million Smart Glasses to Ship from 2012 to 2016

The question on the table isn't whether wearable tech is viable. There is no shortage of wearable tech products out there already -- from heart rate monitor/training watches to the Oakley Airwave from Luxottica, to the Hexoskin shirt, an emergency room shirt that displays your vital signs.

The question is where these sky-high forecast numbers for Google and Apple are coming from.

There is absolutely no sales data available on Google Glass, the product is still in beta testing. Apple's situation is even worse -- since the rumored smart watch is hidden deeply in some Apple lab.

What we all love about numbers is the fact that two times two equals four every time we do it. What does zero times anything equal? Folks, you just can't forecast sales numbers when you don't have a single commercial sale. (Or, in the case of Apple, when you don't even know if there is a product.) At least you can't and expect them to be taken seriously.

Morgan Stanley forecasts $17.5 billion in sales for the iWatch in the first year. When numbers like this are tossed out, they really need to be put in context. 17 billion dollars represents half of the current yearly global watch sales. Switzerland has that large of a share right now.

But how long did that take them? Four hundred years of making the best watches in the world. They've been at it since 1541.

And Morgan Stanley thinks Apple could match that in one year?

Some analysts might argue that Morgan Stanley's forecast can be supported by Apple's amazing track record with the iPhone. As we all recall, Apple changed the smart phone industry almost overnight when it launched the iPhone in 2007. Back then, the fluid touch screen interface and application ecosystem were revolutionary

As an Apple investor, I'm as keen as anyone for Apple to release something genuinely new. As growth in iPhones slows, Apple needs some new invention besides a smart phone with a bigger screen size. And since Apple is no slug when it comes to timing product releases exactly right, and since the company tends to release something new every four years, the iWatch is likely to show up just in time for 2014 Christmas sales.

But then what? With the iPhone, Steve Jobs took something that was not already a fashion accessory and carried all the time and added smart functionality to it, and then made it look cooler. That was the key to the overwhelming and almost immediate popular success of the iPhone.

Apple's success has always relied on revolutionizing proven mass consumer products. When the iPod came out it blew away the competition in MP3 players, as did the iPhone and iPad in their categories. Smart watches are completely different. They are a product for which there is negligible demand in the general consumer population.

Form factors and awkwardness are also a problem. The scale of a screen that can fit comfortably on the wrist is too small for displaying or entering anything but little bits of information. A wristwatch is, by its very nature of being attached to the end of our arm, immobile. Not to mention it can only be manipulated by one hand.

Pricing and competition are other issues. The rumored iWatch will have to compete with Pebble, Fitbit, MetaWatch, Jawbone, Qualcomm's (NASDAQ:QCOM) Toq, Samsung's (OTC:SSNLF) Galaxy Gear and Nike's (NYSE:NKE) Fuel Band. Google and Microsoft (NASDAQ:MSFT) are also expected to join the fray soon, probably with a sensor-laded watch capable of monitoring health information. Pebble and the FuelBand (the best-sellers thus far) retail for $150.

The iWatch will likely not have 4G LTE connectivity. (Who wants to pay $20 to $40 dollars a month for access to a watch?) So there won't be any wireless carrier subsidies to save Apple from having to sacrifice margins. Here's the bottom line. Even if the sky-high projections on sales are realistic, which is a big ask, the iWatch will never be the revenue-generating monster that the iPhone and iPad have been.

For investors to believe that Google or Apple's wearable tech products will significantly move the dial in 2014, the companies will have to deliver wearable technology ordinary people like you and me, people who aren't fitness or information junkies, are going to fall madly in love with. And they will have to deliver it cheap enough that these products will be instant commercial hits.

The likelihood of that happening? What's your take? Mine is that it's slim to none.

And here's the biggest reason of all.

The general public could care less about technology that fails to solve problems that don't exist in the first place.

More Realistic Forecasts

The adoption of a new product category is almost always much slower than anticipated and bumpy to boot. According to Forrester analyst, J.P Grownder, we're probably still about a decade away from wearables becoming ubiquitous, even in niche markets. J.P. Grownder predicts that 2014-2016 will mostly see early adoption of wearables, particularly in healthcare and public safety. He believes that it won't be until 2017 we see wearables become more instrumental in how some employees do their jobs. And wearables in the mass market? That trend might never materialize.

At a Tapei seminar on wearable devices, Jason Tsai of Topology Research Institute forecast that wearable computing market could rise to $18.3 billion by 2018. Where there is no way to predict the sales rate of an unknown product (such as the rumored iWatch), or a product in beta with an unknown commercial sales price (Google Glass), there are multiple wearable tech products out there and it on the basis of their sales Tsai made his forecast.

Assuming the numbers are accurate, and Apple gains one-third of this market, annual revenue for Apple for the iWatch might eventually therefore be $6 billion a year. It sounds impressive, until you recall that Apple's current annual revenue is in the order of $170 billion.

So if the iWatch actually comes out, and is successful, the iWatch might push Apple's financials up by what? Four percent in four years? A tidy sum to be sure, but how much difference is that going to make for Apple investors?

What about Google and its wearable product, Google Glass?

According to an ABI Research forecast, two million pairs of smart glasses could be sold in 2014. Even if 100 percent of the smart glass market is dominated by Google, and the company opts for a 60% margin, that would only bring Google roughly $600 million in gross profit. For a company that recognizes 29.7 billion in gross profit and $10.7 billion net income per year that $600 million is not going to have any kind of significant impact.

Google's Glass: A Pandora's Box of Problems

Google has released its $1,500 smart glasses as a beta program, inviting the public to get in on the product development. Some of these early adopters are singing the products' praises, others are complaining that the screens washout in direct sunlight, are too small to watch television and have low resolution.

Google is fully capable of improving the technology. But that still leaves the question -- who is going to want to wear them?

Affordable, rugged, smart glasses for smart workers could be a large market eventually. But the general public is the target for Google Glass, and in that market the product is already in a lot of trouble.

Just the beta release of Google Glass has opened a Pandora's Box of privacy and legal concerns. Restaurants, bars and movie theatres are banning customers from using the devices, and that's only the first salvo. While I'm not someone who typically gets all lathered up over privacy concerns, do any of us want to have to worry that someone wearing smart glasses is secretly filming or taking a picture of us and then posting it for all the world to see?

Google Glass is going to fall afoul of a big area of the law called the "reasonable expectation of privacy," It's fascinating to note that Google Glass wasn't even invented originally as a product for the general public. The smart glasses were invented to help the search giant target ads at users by doing even more elaborate tracking of behavior in searches.

Google is a company involved in long list of things, but at its core, Google is an advertising company. The vast majority of Google's revenue comes from delivering advertisements. Basically, everything Google has done is designed in some way to gather more info on its users for a more complete picture of buying behavior.

I'll sum it up. What we have with Google Glass is a product capable of invading the privacy of everyone by tracking and photographing them.

And we live in a country that in the next five years will see the graduation of more than 200,000 new lawyers, five times as many as two generations ago.

Wow. I'm beyond skeptical. Google Glasses as a mass market product? The product has so many legal issues surrounding it, I'd call it a perfect storm.

Market Timing and Market Perception

Stock move on perception, not reality. Since Google has an incredible powerful advertising platform, it's likely incessant stories and ads for Google Glass will appear on our computer screens next year. But eventually the earnings will come out and actual sales numbers will be revealed. The same will be true of Apple -- except a possible build-up in Apple's stock is more likely just before the launch of the iWatch. (If the iWatch doesn't appear in time for holiday sales, look out below.) If you're a market timer, you may be able to use the volatility created.

Most investors (including myself) are far more interested in the long-term picture. And when you're talking long-term, the obvious way to play a huge new product category and market trend is typically the weakest way to play it. Long-term, the real opportunities are almost always in the dark horses -- those stocks that are under the radar and where perceived gains aren't already built in.

One way to play wearable tech is to join the frenzy surrounding the obvious suspects (Google and Apple). But there's another way to play it. Wearable Tech: Forget Google and Apple, Think Different (Part II) looks closely at three companies that aren't so obvious.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Wearable Tech: Forget Google And Apple, Think Different (Part I)