Why I'm Skeptical About the Apple iWatch

The expectations around the iWatch may be far too lofty.

Jul 20, 2014 at 12:00PM

Though the world seems to be expecting that Apple's (NASDAQ:AAPL) allegedly upcoming smart watch (dubbed by some as the iWatch) will be a game changer, there's a real chance that the iWatch won't do as well as many seem to expect.

Smartwatches are the latest attempt at the "next big thing"
Ever since the launch of the iPhone in 2007 and then the iPad in 2010, the investment community has been anxiously awaiting the next big thing from Apple as the smartphone and tablet markets mature. 

Now, the argument is that cell phones were just cheap, uninteresting commodities before the iPhone, so Apple can similarly transform the watch market. But it's important to note that Apple's gigantic smartphone profits have, in no small part, been due to a very innovative carrier subsidy model that brought what would otherwise be rather expensive, inaccessible devices to the masses. 

The iWatch would not only need to be a fundamentally game-changing device in terms of the usage model (similar to the iPad or iPhone), but it would need to be accessible at a low enough price so as to drive meaningful volumes and fairly rapid upgrade cycles (the iPad didn't have this, so it couldn't replicate the iPhone's financial success). That's not to say that a company like Apple can't achieve a meaningful financial uplift from the introduction of a smartwatch, but it's not going to be easy. 

The expectations seem to be going ballistic
One important factor that could lead to a perceived "disaster" for the iWatch is that there are a number of analysts putting out some pretty optimistic numbers for sales of this still-fictional device. For example, Morgan Stanley's Katy Huberty seems to think that Apple could sell between 30 and 60 million of these devices at an average selling price of $300 in the first year of availability. 

Driving home this point, Seeking Alpha contributor Paulo Santos recently made a very nice argument illustrating just why even if Apple's iWatch is a smash success, it still might not be a large driver of Apple's revenues/profits.

Moreover, Santos notes that Swatch Group (NASDAQOTH:SWGAY), the leading vendor of watches, generates only $9.86 billion in annual sales across a wide spectrum of watch offerings from the low end to the very high end. Is Apple likely to surpass Swatch Group's entire revenue base in just the first year of availability of the iWatch? It's possible, but this seems very optimistic. 

Foolish bottom line
Only time will tell whether the iWatch -- if it's even real -- will be a commercial success. The real question isn't so much about how well the iWatch does as whether the demand will ultimately keep up with some of the expectations floating around the investment community.

Even if the iWatch is successful in defining a fundamentally useful new product category, it's not at all clear that long-term demand profile for this product category will approach that of the iPad, let alone the iPhone. In that sense, the iWatch seems to be destined for disaster, even if it ultimately ends up being yet another nicely profitable product category for Apple. 

Leaked: Apple's next smart device (warning, it may shock you)
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!

Ashraf Eassa 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers