Why the iWatch Is Apple’s Next Big Success Story

Here's why you should not underestimate the potential of Apple's upcoming iWatch.

Apr 23, 2014 at 6:00PM

Apple (NASDAQ:AAPL) investors have traditionally underestimated the launch of a new product category. However, doing the same again can be a huge mistake. Rumors have long been suggesting that Apple is working on the development of its own version of a smart watch, called the iWatch, after Samsung (NASDAQOTH:SSNLF) moved into this market.

The iWatch has the potential to surpass the estimates of even the most optimistic analysts. Since Apple runs a very tight ship, speculations can take a long time to materialize. However, the so-called iWatch is expected to hit the market in the coming months. 

Keep a close watch on the iWatch
According to research firm IHS, the global wearable devices market will triple to $30 billion in the next four years, and given that the existing smart watches from companies like Sony and Samsung haven't really pleased tech fanatics, Apple can start with a bang. In fact, Morgan Stanley analyst Kate Huberty is confident that the iWatch will rake in nearly $17.5 billion in annual sales.

That's quite a bold prediction, but Huberty claims it's feasible, as every new Apple product has sold more rapidly than the one before it. Apple is reportedly making 65 million units of the iWatch, and if the company manages to sell all of them at an average sale price of $299, the sales will outdo even Huberty's optimistic expectations. Moreover, since Apple products tend to be viewed as a status symbol, an ASP of $299 seems rather underwhelming.

Already trending?
According to a recent survey conducted by Piper Jaffray, 17% of U.S. teens were willing to buy an iWatch if it was available for under $350. This survey, which interviewed nearly 7,500 teens, reported that 61% of the teens now own an iPhone, up from 55% in 2013. The chart below compares the result of this study to the four conducted before it.

Piper

Source: Piper Jaffray


17% is a pretty high rate, especially considering that only 6% of the interviewed teens already owned a smart watch. But, bear in mind that U.S. teenagers tend to be richer that teens in emerging countries, so it's highly unlikely that the iWatch will be as successful in other countries. Nevertheless, Apple derives a large portion of its sales from the U.S., thus the popularity of the iWatch in the nation is a good sign.

What are peers doing?
As stated above, the wearable gadget market is set to explode and, given its vast potential, it is certain that competing companies sit idly by while Apple makes the most of this opportunity. Samsung unveiled its Gear 2 line of smart watches last month, and it will likely be available to consumers in the coming months. The Gear 2 will have an integrated SIM card slot for calling capabilities in place of the Bluetooth "pairing" feature.

The first version of Samsung's Gear smartwatch sold 800,000 units in its first two months. However, the Gear is no match to what's expected from Apple's iWatch, and the Gear 2 may even struggle to surpass sales of its predecessor if the iWatch hits the market first.

Apart from Samsung, both LG and Motorola are developing their own smart watches. LG recently tweeted a picture of its prototype smartwatch, called the G Watch, while Motorola unveiled the Moto 360 on its official website.

Competition in the smart watch segment is heating up, and Apple is reportedly looking to up the ante by adding various health features to its iWatch. The tech giant has been hiring professionals in the medical field, which may just give the company a cutting edge over its peers.  

"Watch" out
Investors shouldn't downplay the potential of an iWatch from Apple since the wearable devices market is expected to grow at a fast rate. Also, many consumers are already excited about the prospects of a smart watch. Finally, considering that there are millions of iPhones in the U.S., an iWatch would be an ideal accessory in today's connected environment.

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Amit Patel has no position in any stocks mentioned. 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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