$1,000 iWatch? You Can’t Be Serious, Apple

It looks nice, but is it $1,000 nice? Fan Mockup Source: Business Insider/Sourcebits

Recently, KGI Securities analyst and in-the-know Apple (NASDAQ: AAPL  ) source Ming Chi Kuo sent Apple fans into hysteria with the announcement of the long-awaited smartwatch. Analysts? Well, not so much. Specifically, the announcement was regarded with skepticism – an all too familiar reaction for analysts covering the iPhone 5c. Many analysts were scratching their heads wondering how Apple plans to sell smartwatches at $1,000. In short, many fear Apple is pricing itself out of a lucrative and undefined market.

Is Apple too worried about margins?
Wall Street has a familiar refrain with Apple: A lack of innovation after Steve Jobs's passing has led to margin erosion. And, in a way, they are correct. Looking at Apple's gross margins over the last few years tells a not-too compelling story for the tech behemoth.

AAPL Gross Profit Margin (Quarterly) Chart

AAPL Gross Profit Margin (Quarterly) data by YCharts

After an initial bump, you can see that the trend has dropped considerably, eventually rebounding to the 37% range. This is an obvious concern because the larger this percentage is the more profit from each unit sold flows down the income statement to shareholders. With that being said, being overly concerned with margins for margins' sake also presents a risk to investors.

Remember the iPhone 5c?
Forgive analysts if they are a typically cynical bunch; it's a requirement of the job. However, this exciting new announcement/product from Apple appears to be a repeat of the iPhone 5c. Rumors around the last huge product offering – the iPhone 5c – reached frenzied levels of debate: What did the "c" stand for? Was it cheap? China? The answer, so far, appears to be none of the above. Basically, it was the iPhone 5 with a plastic case rather than metal and a few minor tweaks. In short, it appears this was a pure margin play by decreasing the bill of goods.

However, fans, analysts, and prospective buyers were looking for a lower-cost phone to bring new audiences into Apple's sticky ecosystem. Yes, a lower-price phone would have probably affected margins, but also would have expanded Apple's reach into emerging markets like China. While the particular cost and price mix can be debated ad nauseam, it is pretty well established that the iPhone 5c is considered an underperforming product by Apple's high standards. Essentially a "tweener," a product without a market with developed country buyers opting for the more expensive iPhone 5s and emerging markets opting for lower cost manufacturers sporting Google's Android operating system.

Notice the similarities?
On the surface, these two launches appear to have nothing in common. What does releasing a new product have to do with releasing a lower-cost existing product? Well, it all has to do with appropriate pricing and consumer's perception of value. Right now, it appears Apple is pricing themselves out of this market with the obscene cost of this new product. Historically, Apple has been able to enjoy premium pricing with its products – although that has moderated in recent times – but asking Apple fans to pay nearly three times Samsung's MSRP of its Galaxy Gear smartwatch may be asking too much in an undefined market. In addition to comparative value, a consumer also looks at total value. When faced with the decision to spend $1,000, does a typical customer opt for the iWatch, a product with tremendous potential but still in the infancy stage, or does that consumer opt for an 11-inch MacBook Air?

Final Foolish thoughts
It's important not to get ahead of ourselves with rampant iWatch speculation. Although Ming Chi Kuo has been accurate in the past, this is all still speculation. In addition, we don't know how many models Apple will bring to market, or the individual value proposition each possesses. However, if the rumors are true it points toward Apple being more concerned with maintaining margins than bringing a new product to the masses. And for a company that generates such a large amount of revenue from one product – iPhones – perhaps diversifying their revenue stream should be a more important goal.

Bigger than watches: Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.


Read/Post Comments (9) | Recommend This Article (8)

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 April 10, 2014, at 4:56 PM, MarkSpector wrote:

    Yesterday, I saw an old model iPod nano on the New York subways. It reminded me of the way Apple could create products for the entire spectrum of New York city subway riders, from lowest price to highest, without hurting their brand. Not sure that current management has the smarts or wherewithal to do that. Time will tell.

  • Report this Comment On April 10, 2014, at 5:15 PM, zippero wrote:

    Ming Chi Kuo is referring to the diamond-and-gold iWatch costing thousands dollars, which is still cheaper than Rolex watches. Run-of-the-mill iWatches will be more affordable

  • Report this Comment On April 10, 2014, at 5:43 PM, TMFJCar wrote:

    @zippero,

    Thanks for reading and for the comment. Hopefully I addressed the point you bring up that there may be multiple watches at differing price points. With that being said, even if the low end costs $500, I fail to see mass adoption of the device. Do I think it's all doom and gloom for Apple, absolutely not. However, this product may not be as large a part of Apple's revenue mix due to its exorbitant costs.

    Thanks,

    Jamal Carnette

  • Report this Comment On April 10, 2014, at 8:05 PM, BuggyFunBunny wrote:

    If you want to estimate the TAM, just add up Suunto sales.

  • Report this Comment On April 10, 2014, at 8:25 PM, zkp wrote:

    I started to buy a Rolex the other day. Then I realized I could have a new MacPro instead. Pretty much the same thing.

  • Report this Comment On April 10, 2014, at 9:40 PM, HotGarbage7 wrote:

    Can we see that same gross margin graph with Samsung and any other competing brands on a side by side basis.

    I keep hearing about how Apple's gross margin's are shrinking. Where is Apple compared to its competitors?

    Can the Motley Fool provide us a look at this?

    Thanks

    Mark

  • Report this Comment On April 10, 2014, at 10:02 PM, TMFJCar wrote:

    Sure Mark,

    Here's the link: https://ycharts.com/companies/SSNLF/gross_profit_margin

    As you can see, Samsung's GPM has increased from under 35% to nearly 40% during this approx. time frame. But I caution you to not compare Apple to Samsung via GPM because it isn't an apples to apples comparison.

    Things like product mix (Samsung sells more lower-margin products -- like TVs) and business decisions (Samsung also makes the chips for its phones -- a higher-margin business) come into play, skewing the results. The trend is a better, yet still flawed, comparison.

    Hope that helps,

    Jamal Carnette -- the author

  • Report this Comment On April 11, 2014, at 1:03 AM, HotGarbage7 wrote:

    Thanks. I see what you mean. This is a good site and tool…i have saved it to my favorites.

    Thanks

  • Report this Comment On April 11, 2014, at 6:56 AM, Interventizio wrote:

    As a consumer, I've never followed Apple in its propositions. Analysts says it is a company that looks at the high-end market and at margins, as opposed to market share. That's supposed to be fair: it's a choice every company has. In the case of Apple, I say they're just greedy and they can go f**k themselves.

Add your comment.

DocumentId: 2910980, ~/Articles/ArticleHandler.aspx, 7/31/2014 4:50:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement