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Is Apple Watch a Needle Mover?


 -- Published: Thursday, 25 September 2014 | Print  | Disqus 

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.

 BearBaseBull
Percent of iPhone Sales10%30%50%
Apple Watch Annual
Units Opportunity (Millions)
154575

At a projected price of $315, we get the following projected revenues.

 BearBaseBull
Apple Watch Sales
as a percent of iPhone Sales
10%20%50%
Annual Units
Opportunity (Millions)
154575
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.

 BearBaseBull
Revenue(Billions)$4.7$14.1$23.6
Profit Margin23%23%23%
Profit (Billions)$1.1$3.2$5.4
Shares Outstanding
(Billions)
666
EPS$0.18$0.53$0.90
Multiple151515
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.

The article Is Apple Watch a Needle Mover? was originally published at caseyresearch.com.

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 -- Published: Thursday, 25 September 2014 | E-Mail  | Print  | Source: GoldSeek.com

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