Will Apple, Inc.'s iWatch Be a Game-Changer?

Investors who are interested Apple (NASDAQ: AAPL  ) stock have undoubtedly been well aware of the ongoing headlines of a rumored iWatch from Apple. If Apple does, indeed, launch an iWatch, it will be a defining moment for the company. Let's take a look at the potential impact the device could have on Apple.

First, some background:

What is the iWatch?
This is a unique year for Apple. While the company announces new products every year, like clockwork, Apple CEO Tim Cook has promised products in entirely new categories this year. This promise has led to ongoing speculation, but most investors seem to agree that this new category will be wearables, and that the device will be a smartwatch called the iWatch.

Broadly, rumors suggest the smartwatch will be available in two display sizes, 1.3-inch and 1.5-inch. One of the key selling points for the iWatch is likely to be its biometrics sensors, similar to the sensors in devices like the Fitbit. Further, Apple allegedly plans to tap into its massive third-party developer relationships to build an ecosystem of health related apps that may help provide the backbone of user health data that will be stored in a new Apple-branded app the rumor mill is referring to as Healthbook. 

Following is an iWatch concept design drawn up by Argentine design student Tomas Moyano.

iWatch concept design by Tomas Moyana. Images used with permission.

The well-connected longtime Apple analyst from KGI Securities, Ming-Chi Kuo, predicts the iWatch will hit the market in the third calendar quarter of this year, right around the expected time for the iPhone 6 launch.

Apple, as always, remains mostly mute on its plans for future products. But Apple CEO Tim Cook has said that wearables is, indeed, an area the company is interested in. Cook even called it a "very key branch of the tree" about a year ago at the All Things Digital D11 conference.

The business opportunity
Among the ways Apple could benefit from the iWatch, here are three of the most important: immediate financial results, long-term opportunity, and brand marketing.

In terms of financial results, it's difficult to estimate how much the iWatch could contribute to Apple's business. Morgan Stanley analyst Katy Huberty estimated that the iWatch could add as much as $17.5 billion to Apple's top line during the first twelve months of availability, assuming an average selling price of $300. If Apple had a gross margin on the device close to its corporate average, this 10% boost to Apple's current revenue levels could provide a proportional boost to the bottom line, too.

Longer term, an iWatch would give Apple a presence in another market that is likely to be an important part of our everyday lives. Having a leading product in the category would help Apple continue to defend the high level of "stickiness" of its ecosystem that keeps customers coming back to its "halo" of product offerings. On the flipside, not having a product in the important category means Apple could loose some of the stickiness of its ecosystem.

Finally, and perhaps most importantly, if Apple does the iWatch right, in a way that revolutionizes the category, Apple could reinvigorate its innovative image in a post-Steve Jobs era. The iWatch will be Apple's first major product in an entirely new category since Steve Jobs passed, making it perhaps one of Apple's most important product launches ever.

If Apple does the iWatch right, it may not only be a game-changer for the industry, but it may be an even bigger game-changer for the stock. Given the conservative valuation for Apple shares today, renewed investor confidence in Apple may convince the market the stock deserves a greater premium to earnings.

Leaked: Apple's next smart device (warning -- it may shock you)
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  • Report this Comment On May 26, 2014, at 1:18 AM, CoreAndExplore wrote:

    It's amazing, AAPL's up nearly 60% from it's lows in 2013, and yet you're absolutely right, shares are still priced conservatively at a current PE of only 14.67 (the S&P is selling at 18.97). While APPLe's overall earnings growth may make it more of a value stock than growth, I doubt it would lag the S&P much if any in that regard. Besides, copious share buybacks will ensure even more impressive EPS growth, as the last quarter made very apparent.

    If AAPL were trading at a multiple equivalent to that of the broader market (as measured by the S&P), it would be trading 29% higher at $794. I think that with such shareholder-friendly policies and a large cash hoard and sterling credit rating with which to implement buybacks and dividend increases, a much higher multiple is warranted than what we've seen for the last 2 years.

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Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

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