This Apple Inc. iWatch Rumor Could Be Huge

What this recent Apple iWatch storyline matters big time for investors.

Apr 17, 2014 at 4:10PM

To turn the common news phrase on its head, you definitely did not hear it here first, but tech giant Apple's (NASDAQ:AAPL) iWatch is coming, and it's going to be big.

We're heading into an exciting time of year across the board for Apple investors everywhere. Next week, the consumer electronics giant reports its FY 2014 Q2 earnings after the bell on the 23rd. Investors everywhere will be looking to glean at least some kind of new information about what Apple may or may not have up its sleeve for the rest of the year.

We've heard plenty of talk about Apple's interest in a mobile payments option, a la Apple CEO Tim Cook's reference to it on Apple's last conference call, but I'm a firm believer that Apple's much-discussed iWatch will also make its way into Apple's product launch schedule later this year.

And in that vein, a new rumor recently broke regarding Apple's coming wearable. And if it holds any merit, it could have big implications for Apple and its shareholders in the year ahead.

Apple's iWatch supply chain secrets
According a widely circulated report from the Chinese newspaper the Economic Daily News, Apple has already finalized its supply chain partners that will assist it in the assembly of its impending iWatch.

The newspaper claims Apple has chosen the Taiwan-based electronics assembly company Quanta Computer as the exclusive assembly partner for its iWatch. And perhaps even more interestingly, the report also claims Apple has contracted Quanta Computer to build roughly 65 million iWatches in the first year alone. The report states that other well-known Apple assembly partners, including the highly controversial Foxconn and Inventec, were also in the running to secure the iWatch contract, but Quanta Computer was able to edge out the competition.

The report goes one step further into the downstream aspects of Apple's supply chain as well. For instance, it claims that, like other Apple chips, the iWatch will be powered by a custom chip that will be designed by Apple but manufactured by Apple's ultimate frenemy Samsung. In addition, the report also asserts that Apple will enlist the material sapphire, and presumably Apple's sapphire sugar daddy GT Advanced Technologies, to comprise the outer casing of the iWatch.

Now, there's certainly something at least slightly alarming about the specificity within this report, although it isn't exactly going out on a limb in highlighting Samsung as the chip-fab partner and GT Advanced Technologies as the sapphire supplier, either. However, this is perhaps the most detailed report I've come across in breaking down which company will handle which specific aspects of taking Apple's iWatch from concept to creation, and that's certainly significant.

Money to be made
Regardless, if Apple indeed plans to build to the 65 million unit estimate given above, Apple clearly has the strength of its convictions about this next-generation device.

I've argued in the past that in order for smartwatches as a category to penetrate into the mainstream, they'll need to contain some kind of functionality beyond that of today's smartphones. And in my mind, the best bet at present, especially given Apple's recent acquisition and hiring movements, is some kind of advanced emphasis on biometrics that a smartphone simply won't be able to match. Either way if the 65 million unit figure is true, it clearly implies Apple is expecting a strong consumer response when the iWatch becomes available.

The report skips over any pricing specifics. However, in looking at a rough comp today, Samsung is selling its Galaxy Gear smartwatch for $249. Apple tends to price toward the high end of any market in which it operates, so it could clearly price above this point. But purely for illustrative purposes, this would mean Apple could be looking at a cool $16.2 billion revenue opportunity in year one alone. The global watch industry is an extremely high-margin space, with gross margins typically sitting somewhere in the 60% range. Since it will use different inputs than the average watch, it's not clear whether Apple will be able to generate margins in the same neighborhood, but the high-level point I'm trying to make is that Apple stands to make a lot of money right away from this new device.

So, this storyline should obviously be taken with its requisite grain of salt, as is the case with virtually all Apple product storylines. However, especially given the degree of specificity involved, this is also a report deserving of Apple investors' attention, certainly.

The one company that could threaten Apple's iWatch
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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