One of Apple's (AAPL 1.09%) best-selling products is no longer being sold in the U.S. Starting Thursday, Dec. 21, online at 3 p.m. and in stores after Christmas Eve, the Apple Watch Series 9 and Watch Ultra 2 will no longer be sold as a result of an ongoing dispute with Masimo (MASI +0.01%).
While this may have blindsided some Apple investors, Masimo investors have suspected this for a while. So, what should investors do with Apple stock?
Apple may lose half of its wearables revenue
In November, the U.S. Trade Commission issued a statement that Apple violated U.S. trade laws by infringing on Masimo's light-based pulse oximetry patent. Apple was given 60 days to pull its products (for a presidential review), and it is finally starting to do that.
This technology allows the Watch to sense blood oxygen content, which is incredibly useful for the health and wellness use case of the Watch. Furthermore, this technology also was used on Series 6 and 7, potentially creating another issue for Apple.
Now, it's unknown what the next steps will be. Apple may strike a deal with Masimo to use the technology or return to the drawing board. Either way, Apple will have to figure something out, as it cannot afford to lose any more sales.
NASDAQ: AAPL
Key Data Points
Throughout every quarter of fiscal year 2023, Apple's revenue declined. This weakness was mostly spread across the board in each segment (except for its Services segment). Wearables, home, and accessories (the segment where Apple would realize Watch revenue) also showed weakness, as revenue fell 3.4% in the fourth quarter and in fiscal year 2023.
While we don't know exactly how much wearables revenue comes from Apple Watch sales, we can make some inferences. In 2022, Apple sold about 53 million watches, according to Business of Apps. I will assume that the lower-cost SE watches balanced out the higher-cost Ultra watches, making the average price tag equivalent to a Watch Series 7 or 8 (because the 8 was launched in September 2022). With a Series 8 watch costing about $400 for the base model, that means Apple generated an estimated $21 billion in revenue from watch sales in 2022.
One thing to note is that the Watch SE isn't being pulled (because it doesn't have the technology). Still, I think the original estimate is conservative, so it's likely that Apple just lost about half of the revenue from this division (it delivered $39.8 billion in revenue in fiscal year 2023, which ended Sept. 30).
Overall, Apple had sales of $383 billion in fiscal year 2023, so watch sales made up about 5% of total revenue. This will create a strong headwind for Apple, yet the stock hasn't reacted. The stock was only down about a percent after news broke on Monday, Dec. 18.
This seems odd because Apple's stock is already priced for perfection.
The stock is incredibly expensive because of its lack of growth
Apple's stock has had a phenomenal 2023, up 51% this year. But much of that return wasn't warranted, as its business hasn't executed at a high level.
As a result, the stock has grown to the point where it has a massive premium attached.
AAPL P/E Ratio data by YCharts.
At 32 times trailing earnings, Apple is a very expensive stock -- especially when the company's revenue and earnings are shrinking. Throw in a catalyst that may wipe out about 5% of sales, and you've got a recipe for a stock that could struggle in 2024.
So, if you're an Apple investor, now may be the time to take some gains, as the company is far from firing on all cylinders heading into 2024.
