Apple (NASDAQ:AAPL) will likely be releasing a smartwatch in the fall of this year, along with refreshes of the iPhone and the iPad. Although the device is currently a rumor, it has a very high probability of coming to fruition, based on Tim Cook's comments in which he stated that he is interested in wearable technology on the wrist. This has not stopped major investment banks from coming up with wildly optimistic forecasts about the possible revenues that this device can bring to Apple. While these rumors are fomenting, Google (GOOG, GOOGL) has already released its own software that will run a form of Android named Android Wear on smartwatches that are made by third-party hardware companies.
Three different high-quality smartwatches are set to be released this summer, so Apple has an increased level of competition in the wearables category already. I am not proposing that Apple will definitely fail, because this is the first major product category launch that is occurring under Tim Cook; I am merely highlighting the competitive landscape that the iWatch will be launched into. The category will be important, since the devices must be paired with a smartphone. Therefore, they may become a factor that sways consumers to purchase a particular phone. For example, if a consumer really likes the Moto 360, then he/she may decide on purchasing an Android phone. Getting users into the Apple ecosystem is important, because once they are in it, it is difficult to leave because all of the devices within the ecosystem communicate with one another.
The projections for the iWatch sales are very high. Two investment banks, Morgan Stanley and UBS, have come up with projected unit sales that are actually higher than that of the release of the iPhone and the iPad. It is difficult to make a prediction regarding the sales rate of a device that has yet to be released; I am simply skeptical of such grandiose guesses. The sales rates of the iWatch will be better understood once the sales numbers of the Android watches are made public. The argument for increased sales of the iWatch is that there are more consumers in the Apple ecosystem (575 million) now than there were during the releases of the iPhone and iPad (120 million), but I believe that the market for this device will be smaller.
I understand that many arguments were made against the iPad when it was first released, because it lacked a large number of applications when it went on sale, but it still ended up becoming a huge success. However, I believe the iPad simply filled a niche that was being poorly filled by netbooks. Even though the amount of applications started out low on the iPad, it still had a web browser and provided portability. In comparing the release of the iPad to the release of the iWatch, I believe that the iWatch will take more time to have such huge sales growth because of the fact that many consumers have never purchased a wearable device. To consumers in 2010, iPad was simply a bigger form of an iPod Touch. Currently, the only comparison that consumers have to a smartwatch would be a Fitbit-type device, but products in this category have only sold 2.7 million units in the first quarter of this year, compared to the 267 million smartphones that were sold in the same time period.
While a new product category tends to bring excitement to the marketplace, the fact that the smartwatch devices aren't truly more portable than smartphones and can do fewer tasks makes sales estimates that are akin to those of Morgan Stanley and UBS seem to be too high. Specifically, Morgan Stanley predicts that there will be 58.5 million iWatches sold at the projected price of $299.
(Source: Business Insider)
In fiscal year 2015, UBS predicts that there will be 21 million iWatches sold.
These two projected sales rates will significantly affect Apple's top line, as they represent $6.5-$17.5 billion in sales. To put this in perspective, Apple had $170 billion in revenues in fiscal year 2013, and has had $103 billion so far this year. As an investor, I use the forward earnings estimates to calculate my price target. When making these calculations, I am cautioning investors to not project overly optimistic sales rates on a product that doesn't exist yet to come up with their Apple price target. Apple is a great company, but consumers' willingness to wear technology has not been proven.
With that caveat being stated, there still will be meaningful sales in the wearable technology space, even if those estimates may be overly enthusiastic. Therefore, I will examine the competitive landscape of the industry. Yesterday, at Google's I/O conference, Google announced three new smartwatches that will run Android Wear. These new devices will all go on sale this summer, meaning that they have the first-mover advantage to Apple's iWatch. The devices are the Galaxy Gear Live, the LG G Watch, and the Moto 360. The devices will all run the same software, so they will all have similar functions, such as the ability to show text messages, show the amount of steps a user took, show the current weather forecast, and show the user's calendar. Users can also interact with the devices by saying "Ok Google".
The two that have the most information released are the LG G Watch and the Galaxy Gear Live, as they went on pre-sale today and will be released on July 7th. The Moto 360 will be released later in the summer, and the only real information available about the device is its round shape. The LG G watch will cost $229, and the Gear Live will cost $199. The wide selection of smartwatch designs and the price range among the devices are the same reasons why Android has led Apple in market share in the smartphone category. As we saw with the lackluster launch of the iPhone 5C, Apple has difficulty with selling devices within one category at different price points. This does not mean that Apple will fail. Apple has been hugely profitable selling the iPhone; I am simply highlighting the fact that the competition is high and that Tim Cook has yet to show himself to be a "product person" as Steve Jobs worried about when he was picked to be his successor. Both the Gear and the G Watch are water- and dust-resistant, while only the Gear has a heart rate monitor. It seems as though the critics were most excited about the Moto 360, so this will likely be Apple's greatest competition.
The takeaway from this article is not to sell Apple's stock. I am simply providing an opposition to the idea that Apple's stock is a buy based on its new iWatch. Apple's stock is a buy because of the stickiness of its ecosystem, as Apple's software makes it difficult for consumers to purchase non-Apple products. So far, Google's Glass product has yet to become a mainstream product, and smartwatch global sales were only 3 million units in 2013. Therefore, I am hesitant to make outlandish projections about sales as of today.
The risk to this thesis would be that Apple continues its run of successful product launches by coming up with a product that is so revolutionary that it outsells the iPad and iPhone in its first 12 months. Clearly, I am not questioning the innovation of Apple or the fact that the product launch will be successful. If Apple can be the first company that can convince consumers to wear technology, then sales may reach the lofty projections that were made by analysts. It will be difficult for the iWatch to gain marketshare, because of the innovative products that will already have been released. The sales of iWatches will likely be limited to iPhone users, unlike the iPad when it was released; the iPad could have been purchased by someone who owned an Android phone.
(Source: Business Insider)
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.