Seeking Alpha
, Think Finance (1,462 clicks)
Long/short equity, arbitrage, event-driven, research analyst
Profile| Send Message|
( followers)  

Summary

  • There seems to be excessive optimism regarding what Apple's upcoming iWatch can do.
  • This is borne by the reaction to my former article. Expectations for the iWatch have gone irrational.
  • Excessive optimism is dangerous for the share price.

Right off the bat, let me say that this article is not about Apple's (NASDAQ:AAPL) valuation. I don't think Apple stock is expensive here as long as the iPhone 6 sells even better than the iPhone 5S did. This article is not about valuation, and besides, Apple was not incredibly expensive back in September 2012 when it started on a 6-month 45% slide, either.

This article is about optimism. Unbridled optimism. Vein-popping unbridled optimism. It comes as a result of my previous article on Apple, "An iWatch Cannot Move The Needle Much." In that article, I explained that even using significantly optimistic assumptions, Apple is so large that a massive success for the iWatch doesn't alter its revenues or net profits that much.

My own assumption was aggressive. I assumed that upon launching the iWatch, Apple would conquer as much of the watch market as the present leader -- The Swatch Group (OTCPK:SWGAY) -- holds. This is basically unlikely to happen. The wearables/watch market is driven as much by utility as it is a fashion statement or represents jewelry. In fashion and with jewelry, people don't all want to be seen wearing the same thing. This puts an upper limit on what any given wrist-worn device can conquer before it becomes ubiquitous and thus undesirable.

But that wasn't the point. By saying this stuff I was not somehow arguing that the iWatch would be unsuccessful. I was not somehow arguing that it was ugly from the mock-ups that are appearing in the media. I was, on the other hand, assuming massive success. A success so large that Apple would in short order match the Swatch Group. And then I showed that having success that large would, still, not move the needle much.

And therein lies the gist of the problem. To my optimistic assumption, the reaction was like I had the plague. That I was somehow bad-mouthing Apple. That the yet-to-be-seen Apple device cannot but be even more successful. That the device, which we haven't seen, was going to not just tell the time, but also measure your blood sugar, blood pressure, transform society as we know it and boil eggs in the process.

Keep up with me here. People seem to be assuming not just that the iWatch (that they haven't seen and some rumors put as "somewhat rectangular," which would be the kiss of death) is going to be as successful as the Swatch Group, but that the thing will sell several Swatch Groups over. People are assuming that for this wrist device, people are not just going to spend what they now spend on watches, but they'll spend several times over.

And they'll do it even without subsidies. And they'll do it as a fashion statement even though people also seem to be willing to believe the thing will be worn to help you with your health and prevent you from keeling over. These thoughts are already contradictory. Any device that's seen as too much of a health monitor is not going to be worn by trendy people. Any device that implies it's checking your blood sugar is not going to be fashionable. Nobody is going to be telegraphing to the prey at large "look, I'm a diabetic here."

But that's beside the point. Because the device won't be checking your blood sugar. Because if there was the technological capacity to do so, there would already be specialized devices for doing it, as there's a lot of demand for that. The only place this device is going to be checking blood sugar is in people's imaginations.

Anyway, what I want to tell here is that people seem to be running wild with their optimism on Apple. The negative reaction to an article where the basic assumption is that Apple could conquer the entire watch market to the level presently held by the Swatch Group is mindless. Apple investors are basically dreaming up a magical device, both in function and in style, which will create a giant market from nothing. A giant market well in excess of wrist watches.

This is very different from when the iPhone launched. Or the iPad. The expectations for those devices were not off the charts even if ultimately the devices did sell off the charts. When the iPhone launched, the expectation was not that it was going to drive BlackBerry (NASDAQ:BBRY) and Nokia (NYSE:NOK) out of business and make the iPhone larger than any of them, even if ultimately, that's just what happened.

Conclusion

This massive optimism presents a risk for Apple shares. It shows that expectations are already at a level that is hard-pressed to be met.

Surely, the iPhone 6 can still deliver a powerful reason for the stock to evolve positively, but it's clear that the expectations for the iWatch already border on the irrational.

Again, my basic premise was tremendously positive. I assumed that the iWatch could conquer as much of the wrist watch market as the Swatch Group already controls. I assumed that Apple would turn into a leader overnight in that space. Seemingly, for most Apple investors, that is not enough. They're dreaming higher. Seemingly, I'd say, these expectations are flying too close to the sun.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: A Tale Of Unbridled Optimism