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