Is Apple Watch a Needle Mover?
Companies / Apple Sep 25, 2014 - 05:49 PM GMTBy: Casey_Research
By Adam J. Crawford, Analyst
The investment community has been up in arms over a lack of innovation from Apple. After all, the company hasn’t launched a new product line in quite some time… that is, until now. Meet the company’s brand-new smart device: Apple Watch. Investors hope the product will send Apple’s stock to new heights. Is that wishful thinking?
Apple brings its new product into a hotly contested space, with the likes of Sony, Nike, and Samsung all offering a competing smartwatch. But there’s a common theme with reviews for these gadgets: not enough features, not enough style. Apple aims to fill this void… and will charge a premium for doing so, of course.
Apple Watch will retail for $349, notably higher than most competing watches. Since Apple is notorious for putting the squeeze on retail margins (it reportedly allows retail as little as 3% on tablets), retailers would likely make 10% on the Apple Watch, placing Apple’s revenue per watch at around $315.
In 2013, Apple sold 150 million iPhones. It would be an extremely tall order to sell that many watches, especially at $350 a pop. So for a base-case scenario, let’s say that 30% of iPhone buyers will purchase an Apple Watch. For a bullish scenario, 50%. And for a bearish scenario, 10%. Using these adoption rates yields the following annual unit sales.
| Bear | Base | Bull | |
| Percent of iPhone Sales | 10% | 30% | 50% |
| Apple Watch Annual Units Opportunity (Millions) | 15 | 45 | 75 |
At a projected price of $315, we get the following projected revenues.
| Bear | Base | Bull | |
| Apple Watch Sales as a percent of iPhone Sales | 10% | 20% | 50% |
| Annual Units Opportunity (Millions) | 15 | 45 | 75 |
| Price per Watch | $315 | $315 | $315 |
| Revenue (Billions) | $4.7 | $14.1 | $23.6 |
Over the past four years, Apple’s profit margin has ranged from 19.2% to 26.7%. Let’s assume a 23% profit margin on the Apple Watch. With shares outstanding of 6 billion and at Apple’s current multiple of 15, here’s our calculation of the impact on share price for each volume scenario.
| Bear | Base | Bull | |
| Revenue(Billions) | $4.7 | $14.1 | $23.6 |
| Profit Margin | 23% | 23% | 23% |
| Profit (Billions) | $1.1 | $3.2 | $5.4 |
| Shares Outstanding (Billions) | 6 | 6 | 6 |
| EPS | $0.18 | $0.53 | $0.90 |
| Multiple | 15 | 15 | 15 |
| Apple Watch Share Price | $2.70 | $7.95 | $13.50 |
Smartwatches will be a nice addition to Apple’s product line in that they will further institutionalize an already iconic brand. However, in looking at just the annual hardware sales, our projections suggest anywhere from a 3% to a 13% impact on share price. At the low end of the projections, the impact is anemic. At the high end, the impact is significant, but hardly seismic. There may be a host of reasons to buy Apple stock, but the Apple Watch by itself isn’t one of them.
The better investment option is to look at companies that supply Apple; this is one of the things we track at BIG TECH. One Apple chip supplier, Avago Technologies, yielded our subscribers over 100% return in just over 12 months, piggybacking on the rise of the iPhone.
For access to our unparalleled investment advice, simply sign up for a 90-day risk-free trial of BIG TECH. If you decide to keep your subscription, it will only cost $99 a year. If for any reason you’re unsatisfied, simply cancel for a full refund. No questions asked.
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Casey Research Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
