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Should You Be Worried About Recent Analysts' Downgrades?

|About: Apple Inc. (AAPL)
Summary

Smart watch category drives some concerns among sell-side analysts.

There are several indicators that need to be tracked before calling it a failed strategy.

Here are some more midterm indicators to track.

During the recent week several Sell-side analysts published a downgrades on Apple (NASDAQ:AAPL) based on fragile expectations from the new Apple Watch category. The concern was based on the will of iPhone users to buy a companion Apple watch. The analysts have raised a big question mark regarding the ability of the company to create a robust new product category as it has done several times before.

While the jury is still out on the full Apple Watch pre orders demand towards the product launch date that is expected on April 24th, there are several midterm, strategic developments that are required to be evaluated before calling out this effort as a failure or a great success.

The first thing is the ecosystem. The smart watch segment has developed rapidly during the recent year and is expected to maintain an ongoing innovators traction around the globe. The Apple Watch possesses a variety of features that are going to accelerate this traction and influence the direction of the Applications and Software developers' community.

The second thing will be the ability to get the Apple Watch to become independent over time. While the first several generations of the watch would most likely be a companion to the iPhone, to become a real category the Apple Watch category should have something that is unique. The Watch will be launched as an extension that moves some of the functions from the iPhone to the "coolest" wearable device. The real leap to become a robust category in the long run would be to innovate new and unique capabilities that are not achieve-able to be delivered effectively by the smartphone.

Today a watch is not really a necessity. Today it is mainly just a fashion object. For years the smartphones has cannibalized the need to wear a watch. The smart watch category led by the Apple Watch is expected to reinvest the need for a watch as an independent device that delivers a value add to user.

Recent research by Juniper Research indicated that should a unique capability will be identified sells could grow by up to 30% in the years 2015 and 2016.

Based on all of that, in order to assess whether this category is sufficiently robust I suggest to track several vectors:

  1. The cadence of new releases, whether it is Software or Hardware to drive forward the innovation around the Apple watch.
  2. Identify new capabilities that were not effectively delivered by other categories, especially by the smartphone and deployed in this new category.
  3. A change in mix of big/small screen iPhone sells. As the watch can take over some of the benefits that a small screen smartphone provides hence it opens the door for a bigger screen smartphones or big screen Phablets which delivers experiences that are closer to those of the tablet or PC.

This should be assessed during the next several months. It will not be resolved during the short term or the launch events as ecosystem build up takes time. I would wait before selling the stock based on Sell-side rating.

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.

Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.