- First weekend orders look very encouraging.
- Initial reviews are mixed but positive in general.
- I will try to assess whether the Apple Watch would have meaningful impact to the company's profitability.
First weekend orders
Apple (AAPL) is expected to have had preorders of about 1 million watches in the US alone on its first day, which is quite a feat considering that Android Wear sold only 720,000 devices worldwide throughout all of 2014. If you want to compare those sales with how the iPad fared, Apple sold only 300,000 of them in the first day.
Here is the breakdown of some of the analysts prediction concerning Apple Watch sales for calendar 2015 (in 3 quarters):
We see that the average sales are 22.47 million units in 3 quarters. If we annualize that amount, we get to about 30 million unit sales in a year. We now know that these numbers are very possible, and they might even be conservative, as there is still a possibility that some of these analysts raise their unit sales because of the positive first weekend orders
Initial reviews are in
The reviews are mostly positive on the Apple Watch, some are mixed, as reviewers take a skeptic view on the usefulness of the device. Most reviewers agree on one thing: the Apple Watch is by far the best smartwatch you can buy. Now, some of the complaints that they have were mostly on pricing, usefulness, fluidity, and ease of use.
I think Apple can address all last three factors with software updates and with the next versions of the Watch. Also, customers will also be more and more familiar with their watch and ease of use will eventually be a non-issue. Pricing is the only one that is limiting sales, and historical data suggests that Apple will not lower prices, as they haven't lowered a new product's price since the iPhone in 2007.
The fact of the matter is that the most important thing is how consumers will react to it, and if they will love its experience or not, then we will have a clearer view on the potential widespread adoption of the device.
Here are the links of some video reviews:
Potential sales estimates
Many analysts are struggling to come up with estimates on Apple Watch sales, as this is an entirely new product in a market that produces less than a million units per year in which we all know Apple will try and dominate. In a sense, it is like an entirely new market, and analysts can't find the right data points. Many have therefore relied on past performance of Apple product launches to try and estimate sales, which is in my view a fair approach.
I will try to estimate sales of the Apple Watch given the analysts estimates for the first year. For future years, I will apply the same growth rate of that of the iPad until 2014, to get to a number of Apple Watch sales for the next 4 years.
I think these are reasonable expectations. We can easily imagine Apple selling about 63 million watches in 2018.
Also, a key number that these first weekend orders gave us a glimpse of is the average selling price - ASP of the watch, which is estimated at $503.83. Some analysts have went as high as 700$ for ASP's to take into consideration the whopping 10 000$ to $17 000 price tag for the Edition model.
Another key factor: margins
Apple Watch Edition falls into the fine jewelry category, where, industry-wide, profit margins can reach 90 percent. We can expect the other models to have signifcantly lower margins, but they should at least be on par with company average, or even higher.
Morgan Stanley expects overall margins to be at 45 percent, but they said even that would be too conservative. Other analysts are expecting as high as 70 percent on global sales as they are applying what the jewelry market usually can net on sales, which would be incredible and unheard of for an electronic device.
Impact on bottom line
The question that needs to be answered is if it carries enough weight to have a meaningful impact on Apple. Here are the results of a reasonable scenario for Apple Watch gross profits for the next 4 years:
If we take the 2015 gross profits, we see that they would contribute about 10% to Apple's earnings for the year (estimated at about $50 billion). That is a great number, and one that continues to improve Apple's profitability.
Where it can get interesting is if we factor in the growth in sales until 2018, where gross profits would reach $15.7 billion for the watch, and that would be no doubt very material to Apple's bottom line.
What if we up those estimates to include the high end expectations of gross margins at 70% instead of 50% and ASP at $650 instead of $500? This is where things start to get interesting:
Even only for the 3 quarters in 2015, that would mean gross profits of
about $10 billion and contribution of about 20% to earnings for the year. When we get to 2018, the gross profits would reach an incredible $28.6 billion.
Of course, gross profits don't directly contribute to earnings, there are additional operating costs related to sales, R&D, administration, etc.
However, considering that Apple has started working on the Watch since 2011, a lot of them are already included in the current operating expenses of the company (especially in R&D). You can therefore factor in higher operating expenses given the start of high volume production, but I think a big part of the gross profits will contribute directly to earnings.
Conclusion
Whether the Watch is a success or a flop is more a matter of opinion, as Apple already praises it as an important part of the post-PC era, and one which they will keep improving and adding new features year after year, until one day it becomes a product that you can't live without. Maybe then will the Watch be a big part of Apple's bottom line.
However, until that happens, it is an additional growth driver: one that does not move the needle significantly, but with enough potential to contribute to Apple's growth for the next decade.
