The one-year anniversary of Apple's (NASDAQ:AAPL) smartwatch offering is less than a week away. Remember when the media, consumers and investors alike were buzzing about the launch of Apple's first major product that was not conceived under the leadership of Steve Jobs? While the results of this launch have yet to be officially confirmed due to Apple's decision not share sales data for the Apple Watch, it is increasingly looking like the launch was relatively lackluster.
The word "flop" has been thrown around, but I think to call the Apple Watch a flop is to exclude some critical context: the Apple Watch isn't just any product. It's an Apple product. When Apple forays into a new area, the product is expected to resonate with consumers of all stripes and redefine the market. If you take a look at past Apple products, this has been a recurring theme - a theme which has built up the Apple brand and has guided it towards the title of "most valuable company in the world." The Apple Watch is not a flop, but it is an Apple flop.
Is the Apple Watch a flop?
Before getting more in-depth and explaining why I think this to be the case, I would like to state that in no way, shape, or form are sales of Apple Watches being affected by competition from Fitbit (NYSE:FIT) and its wearable offerings.
Like many have proclaimed in reference to this comparison, comparing the current iteration of the Apple Watch to any Fitbit offering is apples to oranges (no pun intended). They target completely different markets and do not compete for the same customers. If I was an Apple shareholder, I would actually prefer that Apple compete with Fitbit, but I'll get to that in a little bit.
No, far from doing battle with Fitbit, the Apple Watch is doing battle with luxury watchmakers instead. I believe this to be a miscalculation on the part of Apple management. Why do consumers buy flashy, expensive watches? For functionality! Not likely.
Luxury watches target individuals who want to purchase a status symbol that represents wealth and sophistication. What does the Apple Watch offer that traditional luxury watches do not? Additional functionality. I'm therefore very skeptical of the Apple Watch's ability to disrupt the luxury watch market, considering it does not offer any new advantages over traditional luxury watches - and here's the kicker - that would actually interest the consumers that comprise the luxury watch market.
It is my opinion that Apple made two mistakes when conceiving the Apple Watch:
1. High-end smartwatches are a fad. The market is destined for niche status.
2. The Apple Watch is not necessary. And who's gonna pay $400 for a product that is merely convenient?
Not that anecdotal evidence is the be-all and end-all of a successful argument, but I think in this case my story is relevant. Feel free to skip the next two paragraphs if you don't care about my personal experiences.
I'm a college student and I attended an event on campus a couple years ago hosted by Capital One (NYSE:COF) in tandem with the computer science department. A presenter from Capital One came to demonstrate some examples of using developer tools for smartwatch applications, specifically for the Samsung Gear smartwatch. Each attendee to the event entered his or her name into a spreadsheet at the event and they raffled off a Samsung Gear at the end. Luckily enough, my name was called and I became the proud owner of a Samsung Gear.
My iPhone 4S had broken just days before I won the raffle, so I decided to buy a Samsung S5 in order to try out my new smartwatch. I wore it religiously for the first couple weeks, but then it started to slip to the back of my mind and became something I only wore when I felt like I was wasting my prize. When I finally came to the realization that the watch wasn't necessary and was a non-essential part of my routine, I sold it. My experience seems like an all too common one that consumers have expressed.
This ties back to the second point I mentioned above: smartwatches are not necessary. Mike Murphy wrote a piece in Quartz, which can be found here, that describes this sentiment very well. In his article, Murphy quotes Steve Wozniak as saying in a reddit Ask Me Anything session:
I worry a little bit about - I mean I love my Apple Watch, but - it's taken us into a jewelry market where you're going to buy a watch between $500 or $1,100 based on how important you think you are as a person. The only difference is the band in all those watches. Twenty watches from $500 to $1,100. The band's the only difference? Well this isn't the company that Apple was originally, or the company that really changed the world a lot.
The salient takeaway is the last sentence: the Apple Watch is a relative flop. For a company known for creating products that integrate into consumers lives and make themselves necessary (thereby creating a long-term revenue source), the Apple Watch has been a pretty massive swing-and-miss.
Now maybe Steve Wozniak is just pontificating nostalgically about the Apple he used to know and about the sorry state of affairs at Apple now, but I think his point is valid: where is the staying power? Where is the necessity of the product? These are critical to long-term product success, and I think Apple supporters will have a hard time answering those questions.
What are short-term stock implications of the Apple Watch's "flop"? None. None whatsoever. Apple's stock price won't be affected because the company won't release sales numbers, so poor watch sales won't even affect investor sentiment until that information becomes available. Apple Watch sales also make up such a small portion of Apple's revenue that quarterly earnings reports give no indication of whether quarterly watch sales were underwhelming or not. How about long-term impacts on stock price?
It has been said before, but it bears repeating that the Apple Watch might be an indication of stagnant innovation in Cupertino. This is an uncharacteristic misstep for a company that may have become too reliant on brand loyalty. Perhaps this is nonsense, but it doesn't matter. Apple is the most valuable company in the world. Apple's stock performance reflects investor trepidation over buying into the company's current narrative. AAPL is down 14% over the past 12 months and upward catalysts are fairly nonexistent. Apple needs to get back to what made it great in the first place: simple, user-friendly, and above all necessary products that have the ability to morph current markets and even create markets of their own. I think Apple's stagnation in the stock market is mainly due to investor uncertainty over the company's future earnings. Ameliorate that concern, and the stock will chug ahead.
As I mentioned earlier in the article, if I was an AAPL shareholder, I would actually want the company to compete with Fitbit in the low to mid-price wearable range. At least one analyst thinks that the Apple Watch 2 will be leaner and more focused than its predecessor, which I think will place the product in a much better position.
I mean come on, who's going to buy a $400 smartwatch for a phone that costs almost the same amount? Evidently, not even Apple's legions of loyal followers.
I came across an article that claims another way in which Apple could compete with Fitbit: mark down the prices of older generations while newer generations maintain the same price that the past generation did upon launch. After all, this strategy worked wonders for the iPhone and iPad. However, a caveat is that the iPhone and iPad also saw strong demand for current generation models while that is likely not the case for the Apple Watch. I think the best strategy for Apple going forward would be to readjust the target demographic and shoot for the low to mid-price wearable market.
My question to you, the reader, is: do you like the market in which the Apple Watch is currently positioned (i.e. the luxury watch market) or would you rather see a pivot toward the low to mid-priced market to boost exposure and sales? Feel free to respond with a one-word answer or a lengthy tirade in the comments section. Thanks for reading!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.