Just How Massive Could The Apple iWatch Be For Investors?

Running the numbers to try to get a handle on just how significant the coming iWatch could prove for Apple shareholders.

Jun 23, 2014 at 12:00PM

By now, hopefully I've convinced you that Apple's (NASDAQ:AAPL) iWatch is on the way. If not, it certainly hasn't been for lack of trying.

Iwatch Patent Image
Source: U.S. PTO

In the past several months we've seen mounting evidence left and right that Apple intends to not only enter, but -- in my estimation -- also revolutionize the budding smartwatch industry later this year. However, just how significant a profit machine the iWatch could be for Apple remains open to debate. So as we head toward an action-packed second half for Apple, let's look at some numbers to at least try and gauge the iWatch's broader financial implications for Apple investors.

Step 1: How big will smartwatches become?
If financial assumptions aren't your thing, this article might not be for you. Thankfully market researcher and forecasting firm IDC has come to our rescue in our attempt to hang some hard numbers on the iWatch opportunity.

According to IDC, 2014 will be a breakout year for the smartwatch. By their calculations, the global market for wearable computers, a term they use to encompass other wearables like fitness bands as well as smartwatches, will reach 19.2 million this year. Perhaps more importantly, this emerging gadget category will reach 111.9 million units shipped in 2018, good for an annual average growth rate between then and now of 78.4%.

As noted above, IDC lumps both lower-tech wearbles like Nike's Fuel Band and more advanced smartwatches like Apple's eventual iWatch into the same category here. However, there's plenty of reason to think that, especially as time goes on, the more advanced smartwatches will increasingly cannibalize their lower-end brethren as their various functionalities get integrated into smartwatches. Case in point, Nike already pre-empted this inevitability earlier this year when it announced it would stop producing the hardware for its highly popular FuelBand to focus exclusively on the software side of the thing.

So for simplicity's sake, we'll assume that these figures represent smartwatch shipments entirely. Again, not perfect, but enough to get some kind of plausible barometer for the size of the smartwatch market in which Apple will eventually operate.

Step 2: How much will the iWatch cost?
Ding, ding! Round 2 of assumptions coming your way. At present, higher-end smartwatches such as Samsung's Galaxy Gear 2 and Qualcomm's Toq smartwatches cost in the neighborhood of $249 to $299, and it's probably fair to assume that given Apple's penchant for high-end pricing it won't price its smartwatch much lower than this rage, so we'll go with $299 as a base case estimate.

Step 3: Estimate market share
Now, finally we need to get a handle on just how much of this smartwatch market Apple will be able to capture at our assumed price. There are a lot of ways to skin this cat.

Reports of Apple's initial build plans for 2014 alone claim the tech giant expects to ship between 10-15 million, so that could be a good starting point for year 2014 iWatch sales. Assuming Apple follows its usual playbook and makes the iWatch available in time for the holiday shopping season, this could generate between roughly $3 and $4.5 billion in Apple's FYQ1 2015. This would represent between 5-8% revenue growth in its first quarter alone. Looking at 2015 as a whole, BMO Capital Markets recently estimated that the iWatch would reach a 10% penetration rate for Apple's currently installed base of iPhones. Under this assumption, the iWatch would ship some 33.5 million devices in all of Apple's FY 2015, for a fresh revenue stream of $8.3 billion.

Switching to the long-term and IDC's estimate of 111.9 million units shipped in 2018, Apple's market share for other products at the time of their 5-year anniversary could prove instructive. For instance, Apple's iPhone was able to garner 18.7% of the global smartphone market in 2012. And although a pretty drastic assumption, this would yield only 20.9 million units shipped, well below BMO's 2015 estimates in the above paragraph.

Foolish bottom line
More than anything, I hope you've taken these figures with a healthy dose of skepticism as they're by no means a sure thing. At the same time, hopefully the logic driving some of these assumptions seems reasonable enough at least.

More importantly, if these numbers are to be believed, it would mean that the Apple iWatch would be massively overhyped, as it would only represent a drop in the bucket relative to Apple's already-massive sales base. This has been a key concern tempering investors' bullishness on Apple for some time. Ultimately, only time will tell whether or not these figures made even the slightest bit of sense. However, if they prove true, Apple investors might do well spending more time focused on Apple's still immense growth opportunity with the iPhone 6 instead.

A better way to cash in on Apple's iWatch growth
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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