This Apple Inc. iWatch Rumor Could Be Huge

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.

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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 17, 2014, at 4:30 PM, GaryDMN wrote:

    Apple doesn't need to make an iWatch, but Google and Samsung wish they would, so they would have something to copy. They aren't doing to well with the watches they hyped up. It wouldn't surprise me if they started the rumor to begin with, trying to one up Apple. GTAT has already made Apple the world's largest sapphire glass and unless they plan on selling more watches than there are people on the planet, they more likely will be using sapphire glass for iPhones and iPads. Look for them to use Liquidmetal too. They have locked up the key technology suppliers for both Sapphire glass and Liquidmetal, while building a patent portfolio around both technologies.

  • Report this Comment On April 17, 2014, at 4:43 PM, Renee wrote:

    GaryDMN is being a typical Apple fanboi: he is ALREADY condemning Google and Samsung for copying a wearable smartwatch. How is that logical??

    Apple haven't even released theirs! Meanwhile, if anyone will be copying, it would be Apple, as they haven't even released theirs.

    Get your logic straightened-out. Then post.

  • Report this Comment On April 17, 2014, at 6:32 PM, aardman wrote:

    Actually Mr. Toner, seeing as Apple is the one providing the financing for the new Sapphire factory, it's Apple who is GTAT's sugar daddy, not the other way around. :-)

  • Report this Comment On April 17, 2014, at 7:20 PM, RattyUS wrote:

    Walk away, Renee.

    Remind me again how these Google and Samsung devices are doing?

    Here's the thing. The Galaxy Fit has some "going to put it in the drawer" type reviews. How are any of these things being a success?

    You sound like the idiots who proclaimed Apple was too late entering the MP3 player market. They were late but they were significantly better than the devices available first.

  • Report this Comment On April 17, 2014, at 9:18 PM, jrs5 wrote:

    Agree with Gary above, they will be using sapphire screen with liquidmetal casing - molded together in a seemless, waterproof watch. They have invested big time in both sapphire and liquidmetal and patents shows exactly how liquidmetal can be injection molded around the sapphire to make a extremely elegant, durable, and waterproof device. May see it in the iphone too.

  • Report this Comment On April 17, 2014, at 11:38 PM, Foolonthepill wrote:

    Few writers of any sort have a more passive vocabulary that the staff at Motley Fool. Passive words like "might" "may" "could" "would" are used on a regular basis as substitutes for "can" and "will" especially when new Apple products are the topic of discussion. It's as if Motley recycles the same AAPL puffpiece and swaps out iWatch for Apple TV, and the two-years-too-late 5" iPhone in the subject line. I'm sure your working on your damage control contrarian view op-eds for next Wednesday after the close when AAPL misses its numbers and the stock plummets to $450.

  • Report this Comment On April 18, 2014, at 12:36 AM, DKRIEB wrote:

    A watch is a piece of jewelry and an iWatch type of device will need to meet that need. Just look at what Seiko offers: http://www.seikousa.com/collections/astron/

    While I appreciate functionality I want something that looks good. The challenge will be to design the appearance so people will want to wear it, not a techy, gimmicky type of thing that shouts "look at me I'm a geek"

  • Report this Comment On April 18, 2014, at 1:12 AM, imvho wrote:

    @DKRIEB

    Exactly, which is why Apple will demolish the Googles and Samsungs of this world with their no-new-features but totally nerdy design wearables.

    Apple on the other hand hired Paul Deneve, the CEO of high-end fashion brand Yves Saint Laurent to oversee the wearables division thus proving one important fact.

    Apple gets it.

  • Report this Comment On April 18, 2014, at 1:59 AM, skippywonder wrote:

    I think those Seiko watches are fugly. Not as bad as Galaxy Gear, of course, but chunky and full of buttons. Not sleek and modern looking at all. If that's your thing, fine. But Apple will be making something more consistent with its clean line aesthetic.

    Regrading the Foolonthepill's comments about AAPL plummeting to 450, I am not sure how it can when Tim Cook has demonstrated that Apple will charge in and spend billions if it has to in order to snatch up shares at $500. Their results may indeed be a little weak -- they didn't release anything new and las year's iPhone sales were buoyed by a later release date in China. Also, their forward guidance is a big concern. But the stock is not priced for perfection here. It is priced for blah, so a boring report may not ding it too badly. Especially since many people see that TC has put a 500 floor under the stock.

    The real action in AAPL will begin this summer, so any softness in the share price has to be seen as a time to add, not a time to abandon ship.

  • Report this Comment On April 18, 2014, at 5:49 AM, Microwave52 wrote:

    Andrew Tonner has NO credibility. He was pumping Apple back when it was at $700. Follow his advice/logic at your own peril.

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