Every time a new Apple (AAPL -0.28%) product arrives, tech investors are eager to discover which supply chain companies manufactured the components inside. The Apple Watch was recently torn down by several firms, and some revelations were more surprising than others.
The Apple Watch. Source: Apple.
No InvenSense sensors
A teardown at Chipworks confirmed reports that InvenSense (INVN), a leading manufacturer of micro-electrical-mechanical systems (MEMS), didn't provide the six-axis gyroscope and accelerometer for the Apple Watch. Instead, that coveted spot went to its larger rival STMicroelectronics (STM -1.44%).
This is a disappointing setback for InvenSense for two reasons. First, it failed to build on its relationship with Apple after manufacturing gyroscopes for the iPhone 6 and 6 Plus. Second, InvenSense CEO Behrooz Abdi declared that his company had a 100% market share in smartphone sensors earlier this year. However, that share will inevitably plummet as Apple Watch enters the market. IDC expects Apple to ship 15.9 million Apple Watches in 2015, which will account for 62% of the entire market.
But if the Apple Watch sparks mainstream interest in smartwatches, sales of Android Wear watches will likely rise. That will boost InvenSense's top line, since it still dominates the non-Apple Watch market for smartwatch sensors. However, other smartwatch OEMs might be lured away by STMicroelectronics, especially if its MEMS cost less. That would certainly be disappointing, but losing the smartwatch market won't cripple InvenSense, since the company already generates plenty of revenue from selling smartphone motion sensors.
Analog Devices and Texas Instruments components
The Chipworks teardown also found Analog Devices (ADI -1.07%) and Texas Instruments (TXN -1.62%) components inside.
Analog Devices, which designs and manufactures a wide variety of integrated circuits, MEMS, and power management products, supplied the capacitive touch screen controller for the Apple Watch. Texas Instruments provided the op-amp (operational amplifier) for the Apple Watch. Op-amps are cheap components which cost just a few cents on moderate production volume. Therefore, sales of op-amps probably won't generate much revenue for TI even if Apple sells millions of smartwatches.
But if we look closely at Apple's aforementioned supply choices, we'll notice a trend: Apple prefers to deal with underdog suppliers instead of market leaders. Apple likely does this to command lower prices, since underdogs are more willing to sell cheaper components to gain a presence in the smartwatch market.
A tiny battery and a "secret" blood oxygen monitor
An Apple Watch teardown at iFixit revealed two other notable features: a tiny battery and a deactivated blood oxygen monitor.
The Apple Watch's battery has a capacity of just 205 mAh, which is much smaller than the 300 mAh batteries found in the Samsung (NASDAQOTH: SSNLF) Gear Live and Moto 360. Apple claims that the battery should last up to 18 hours, which is comparable to most high-end Android Wear devices. Smaller batteries also charge quickly. Apple claims that the smartwatch requires just 1.5 hours to charge to 80%.
The deactivated blood oxygen monitor was a surprising discovery, since there aren't any apps that utilize it yet. The sensors deliver light pulses through the skin and measure the number of oxygen molecules which reflect the light back. This suggests that upcoming apps, synchronized to HealthKit, could offer deeper health tracking features beyond tracking steps and heart rates. Last year, Samsung introduced the Simband, a health-tracking wearable which uses modular light pulse sensors for similar purposes.
The takeaway
The teardowns of the Apple Watch reveal three main things: it relies on market underdogs for components, its battery is smaller but fairly power efficient, and more sophisticated health tracking apps could arrive in the near future.
Investors should be careful when investing in supply chain players because they often win contracts by selling their components at rock bottom prices. Meanwhile, Apple likes to alternate between suppliers to reduce its dependence on single companies, which leads to unpredictable growth over long periods. In my opinion, teardowns like these usually reveal that the safest way to invest in Apple products is to simply buy Apple stock.
