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Apple's Watch Will Be Bigger Than You Think

Apple (NASDAQ: AAPL  ) doesn't even have a smart watch on the market, but that's not stopping naysayers from shooting it down.

Jefferies analyst Peter Misek -- who has an uninspiring hold rating and $420 price target on the shares -- talked down the prospects of the long-rumored iWatch yesterday.

By his math, with an installed global base of 250 million iPhone users and a 5% penetration rate -- or just 2.5% a year given the two-year replacement cycle on iPhones -- he's projecting just 6 million of these devices shipping annually. At an average selling price of $175 apiece and a modest 30% gross margin this translates into just $0.27 a share in earnings and $1 billion in revenue.

It's hard to argue with the price. Apple won't be able to sell these for much, and they won't be subsidized by carriers the way that iPhones are domestically. Pebble established the market with its $150 smart watches, and Apple won't be able to go for much more of a premium if the functionality is the same.

However, it's hard to accept that just 6 million people will be buying these a year. Apple has too many hardcore fans. If 5 million people turned out to snap up Apple 5 smartphones the weekend it hit the market, there will be a lot more than 6 million early adopters over the course of the iWatch's first year on the market. 

We're also assuming that Apple isn't going to raise the bar here. The iPhone changed the game for smartphones, and the iPad introduced the world to a form factor that it didn't think it needed. This isn't going to be the iPebble. If that was it, we would've seen it by now.

Misek is generally unimpressed by the current crop of smart watches on the market. The small screens and cumbersome buttons aren't enough to justify the convenience of not having to take the paired smartphone out of the pocket or purse.

Wearable computing has been more hype than marketability. Google turned heads when it first showed off Google Glass, but criticism has grown now that they are being spotted in the wild as beta testers kick the tires.

However, Apple won't get that kind of negative reaction with the inevitable iWatch. It won't be as expensive. It won't look as fashionably suspect.

To be fair, Google isn't as hungry as Apple. It doesn't need Google Glass to be a hit. Apple, on the other hand, can't afford to fail with its next new product. Confidence and the shares have come under pressure since the iPhone 5 rolled out, and a poorly received new product would further call into question the company's ability to innovate under CEO Tim Cook.

However, it's also comforting to see analysts already talking down the smart watch. It will make it that much more impressive when it does hit the market. More importantly, few seem to be hitting on the real reason to get excited about the iWatch. It's not about the money that Apple will make. It's about improving the iPhone experience. It's about retention. It's about making the iPhone cooler than an Android smartphone paired up with a Pebble. It's about raising the bar -- again -- in mobile. It's about forcing everyone else to catch up.

The iWatch will matter. It better.

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Read/Post Comments (14) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2013, at 11:29 AM, p2i wrote:

    People plunk down $6K for a Rollex and all it does is keep time. So why would Apple need to sell smart watches for $175?

  • Report this Comment On June 19, 2013, at 11:34 AM, CalvinballPro wrote:

    If Pebble's is $150, Apple's will be $220-$260, not $175. Has this clown writer never compared Apple prices to competitors before?

  • Report this Comment On June 19, 2013, at 11:54 AM, netscorer wrote:

    Rollex is a status statement. iPhone is a fashion statement. Different audiences, not necessarily overlapping.

    Regardless, iWatch does not have to be a hit. Unless we see something truly revolutionary, I would not expect it to have a substantial influence on the bottom line and stock price. Apple's bread & butter is iPhone and iPad. These product refreshes would have much larger impact on the trust in the company ability to innovate and, subsequently, it's ability to keep printing the money.

  • Report this Comment On June 19, 2013, at 12:09 PM, dknuth1 wrote:

    A Rollex is also made out of gold, platinum, and diamonds vs apple's plastic and aluminum. A Rollex is also hand made in Switzerland vs a Chinese sweatshop. Even so, Apple will never sell anything for $150 or even $200, they're too proud not to put a huge premium on their stuff.

  • Report this Comment On June 19, 2013, at 12:36 PM, greenember wrote:

    Still don't understand who would want a bulky watch that needs regular recharging and has to give off light just to be used. Anybody really think movie theaters aren't going to kick you out for using one like they do with phones already? And schools? You can't carry phones in most schools now, so do you think they're going to let kids wear little cheat screens on their wrists? I can't see universities allowing these in testing halls either. So where is the audience?

  • Report this Comment On June 20, 2013, at 5:45 PM, geekdadnyc wrote:

    Nobody knows what the iWatch is -- everyone's just repeating the empty rumors that they've heard. Apple's never even used the term "iWatch". All this talk signifies nothing.

    If Apple comes out with something that's a watch like the iPhone was a phone, then it will be significant and interesting, and probably sell really well. If it's a watch like a rolex is a watch, then it'll fail miserably. Either way, nobody outside of Apple has a clue yet.

  • Report this Comment On June 21, 2013, at 1:04 PM, Fulish2 wrote:

    I read all this chatter about a product that seems to be nowhere but in some people's imagination, so far anyway. I own APPL stock & I believe this company is far from being outdone by any other tech company. I also believe that the next product they come out with will sellout just as quickly as all the other products they have released. Their products, which I own, are easy to learn their warranties are second to none and their customer service is excellent. I bought one of their iPads and 2 months later they came out with a new one so one day I just commented to a customer service rep. that I wished someone would have told me that there was going to be a new one so soon. I nearly fell off my chair when I was told that they would take mine back & replace it with the new one. They even sent me prepaid packaging to return it in. What other company has ever done that? None that I have dealt with.

  • Report this Comment On June 21, 2013, at 1:46 PM, iPitydefool wrote:

    This is classic scenario for for a new AAPL product launch- a class of device that already exists but with very underwhelming products in the market. AAPL then delivers something that completely revolutionizes, and effectively creates, the market and everyone else is stuck playing catchup. Think iPods with mp3 players, iPhones with smart phones (i.e. blackberrys), and iPads with tablets. Heck, they did it with personal computers back in the 80s. Expect the same thing with the so called "smart" tvs currently on the market- none of us have any idea what a smart tv is really capable of until we see AAPL's.

    That being said, all those other times had Steve Jobs at the helm, overseeing not just the design of the product but also the marketing aspects of how they were introduced to the market, including the critical aspect of making them "cool". Think the iconic iPod commercials with U2 in them 8-10 years ago- that was all Jobs.

    So this next product launch will tell us a lot about the future of AAPL. As much as I love the company, its products, and the stock- I'm selling if either the product or the marketing is a dud.

  • Report this Comment On June 21, 2013, at 1:49 PM, divedogg wrote:

    I don't see the iWatch being much of a game changer. Apple needs to come up with a bigger breakthrough. It's a tough challenge. Maybe it will be in robotics and AI. Siri will truly become your personal assistant, that sort of thing. Of course Google is thinking along the same lines. Google and Apple will duke it out as the top innovators in consumer tech. Oril, your comment is hilarious but I wouldn't count out Apple yet. I'm much more bearish (long term) on Microsoft personally.

  • Report this Comment On June 21, 2013, at 2:44 PM, 48ozhalfgallons wrote:

    Fulish: I believe you have stumbled upon the next Apple miracle device..... the iOwn.

  • Report this Comment On June 21, 2013, at 2:46 PM, 48ozhalfgallons wrote:

    The iBot vs iBought

  • Report this Comment On June 21, 2013, at 11:05 PM, williamhcarver wrote:

    The iPhone will be phased out. The iWatch, if it's the real deal, which I suspect it is, will become the next step in personal computing. Just saying, that while the math projections may be accurate from this paradigm, I don't believe they accurate consider the direction in which technology moves. It's always gotten smaller, less prolific and intruding- less...obtuse. Information is moving to the cloud; Google is becoming all seeing and knowing; the desktop is for the most part, done; the laptop is next and while the technologies of the tail end of the spear are discontinued and fall away to display at the Smithsonian, the new technology at the leading edge comes into fruition. I think that's what we're seeing now. Which is why I say the days of the iPhone.. and phones in general.. are numbered. The tech moves to the wrist and the information and apps move to the cloud and they too eventually fall away to the likes of Siri or Google Now or similar HAL-like app that reaches back and provides the user whatever information they need or want at the time; all the time monitoring them and their environment; ever present; ever accurate; ever connected.

    Sorry for the diatribe, but I was attempting to support my bottom line- which is, while the iWatch projections may be small, they don't take into account the projection of replacing the iPhone entirely and putting one on every man, woman and child on the planet.

  • Report this Comment On June 25, 2013, at 9:47 AM, eastpass wrote:

    The iwatch may be another version of the Dick Tracy watch...entertaining but lacking practicality. I am a boomer and need a big screen. Lots of us out here and we enjoy Apple products. I fear the watch will be a dud, but as a shareholder, hope that it proves me wrong. I am concerned Cook is evolutionary and lacking revolutionary vision. He has stated that game changing products are coming. If that were Steve Jobs speaking, I would be backing up the truck and loading up on my favorite tech company. But, it is Cook who I am not sure is a visionary. A wrist watch in my opinion is not a game changer nor a disruptive device. Holding my breath that he delivers and erases my doubts. Tough holding this company here.

  • Report this Comment On August 13, 2013, at 2:56 PM, thidmark wrote:

    Soon to be followed by the iWatch Mini ,,,

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