The athletic apparel and technology industries are about to join hands. Wearable technology is one of the major themes circulating throughout these two worlds, and for good reason. In the not-too-distant future, consumers may have the ability to tap into a wide range of health and fitness applications on their wearable devices.
One company that stands to benefit hugely from this is Nike (NYSE:NKE). That's because Nike could leverage its world-class brand to offer consumers a host of fitness-driven data, all with the goal of maximizing performance.
By partnering with Apple (NASDAQ:AAPL), Nike has the opportunity to become much more than just an apparel company. By going digital Nike can revolutionize its industry, create new revenue streams, and in effect take a position as a global technology giant.
Tantalizing growth potential
Nike already has 30 million NikeFuel users, and management hopes to increase that more than three-fold to 100 million. To do that, Nike is working closely with Apple, and any partnership between the two offers immense potential. That's because Apple is on the cusp of releasing its much-anticipated iWatch. Some analysts have speculated that Apple could debut its wearable device as early as the third quarter of 2014.
FuelBand software on the iWatch could instantly mean millions of new potential customers for Nike. As users adopt the FuelBand technology to track their physical activities and monitor their fitness progress, it stands to reason that they'll be more likely to purchase Nike apparel so they can reach their performance goals. This is especially true given the existing consumer connection with Nike's sterling brand.
Nike's brand strength continues to drive excellent financial performance. Revenue jumped 13% last quarter to $7 billion. In addition, Nike's pricing power indicates its brand quality as well. Higher average prices resulted in the company's gross margin expanding by 30 basis points, which helped boost profits.
The inclusion of FuelBand software on the iWatch could make further margin expansion possible. As a result, it's no mystery why Nike is so intent on being an integral part of the wearables business going forward. Also, by focusing on software instead of hardware, the integration possibilities and higher profit potential are compelling catalysts.
Nike CEO clears up the confusion
Recently, reports swirled though financial media outlets that Nike had laid off a portion of its digital sports staff. Speculation turned to the idea that perhaps Nike's FuelBands would fall flat. However, Nike's CEO quickly rebuffed this idea on CNBC, stating that his company was by no means abandoning the FuelBands product. Instead, it's simply shifting its strategy from one area of the business to another.
Going forward, Nike plans to focus intently on software rather than hardware. This makes sense in a couple of ways. First, Nike has determined that software could be much more profitable than hardware, due to its fatter margins. In addition, by manufacturing hardware Nike would be moving outside its core competency.
It seems logical that Nike partnering up with an existing hardware juggernaut like Apple would be a wise decision. After all, why should Nike go it alone and compete against Apple, when it could partner up and let Apple do the heavy lifting on hardware?
The bottom line
Nike's push into software comes at just the right time. The decision by Nike to trim back its hardware investment to focus on software on the cusp of a possible iWatch debut seems to imply the formation of a serious partnership between Nike and Apple. This makes perfect sense, since Nike could offer several ways for users to track their physical activity and monitor their fitness levels and performance goals. That would instantly open up a new revenue stream for Nike and create the potential for those users to buy more Nike apparel.
As a result, it's clear that Nike has plenty of opportunities for growth left in the pipeline. In just a few months, we may have a clearer picture of this once Apple finally unveils its much-anticipated iWatch.
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Bob Ciura owns shares of Apple. The Motley Fool recommends Apple and Nike. The Motley Fool owns shares of Apple and Nike. 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.