The Apple (NASDAQ:AAPL) Watch product category has been a smash hit for the company. According to Canalsys, Apple shipped about 18 million Apple Watches in 2017, representing a stunning 54% year-over-year growth rate. Moreover, sales of the company's latest model -- the Apple Watch Series 3 -- apparently made up 48% of all Apple Watch sales during the year.
Apple has continually improved the performance and capabilities of the Apple Watch with each new iteration, which has helped to spur the rapid adoption of the product category.
According to generally reliable analyst Ming-Chi Kuo with KGI Securities, Apple is preparing to launch a redesigned next-generation Apple Watch this fall, which likely will be called Apple Watch Series 4 -- presumably alongside the rumored trio of new iPhones that the company is expected to reveal.
Kuo reportedly claims that the Apple Watch Series 4 will incorporate a "more trendy form factor design" (as 9to5Mac points out, the first three generations of Apple Watch use the same case designs), a 15% larger display, a larger battery capacity, and "enhanced health monitoring."
Kuo didn't talk much about the potential internal specification upgrades to the device, but I would expect Apple to introduce a new processor with dramatically enhanced CPU and graphics performance, as well as improved wireless performance, to boot.
Let's go over what this could mean for Apple's business.
Kuo thinks that Apple is going to sell between 22 million and 24 million Apple Watch units during 2018, which would represent a 27.7% year-over-year increase at the midpoint of the range. Such a growth rate would be a slowdown from the prior year, but growth rates tend to slow down as the baseline gets bigger.
For some context, if Apple sells 5 million additional Apple Watches during 2018 at an average selling price of around $400, then Apple would be looking at $2 billion in additional Apple Watch-related revenue. If Apple can pull off that kind of growth, especially off of the already solid foundation laid down in 2017, it would be quite impressive.
Over the long term, Kuo thinks that Apple Watch sales will get to around 50 million units per year. If Apple can get to that level and sustain it, Apple Watch revenue wouldn't be too far off from annual iPad or Mac revenue -- an incredible feat.
The Apple Watch likely isn't going to prove to be as successful as the iPhone -- I doubt Apple will be able to recreate that level of success with any new product category -- but the Apple Watch is far from a hobby-like category and is quickly becoming as big as the iPad or the Mac.
The key to Apple's long-term success -- in addition to strengthening its positions in its pre-existing product categories -- will be to come up with new product categories that can achieve the same degree of success as the Apple Watch. The more of them Apple can cook up, the larger and more diverse its revenue stream will ultimately be. More revenue from an increasingly diverse set of sources is a good recipe for a higher share price.