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Apple’s iTime: Will It Be the Next iPhone, iPad, or iPod?

By Jamal Carnette, CFA - Aug 16, 2014 at 12:00PM

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How well will Apple's new rumored smartwatch sell?

Source: Computer Hoy

Once again, Apple's (AAPL 2.45%) rumored smartwatch -- dubbed iTime -- is in the news. Recent reports, courtesy of Daring Fireball journalist John Gruber, speculate Apple will release the product sometime next month with a case made for September 9 -- the same day as Apple's rumored new iPhone launch.

While anxious fans await, investors want to know how this product -- if true -- will help Apple as an investment. For such a huge revenue producing giant, Apple keeps a rather slim product line. The company really only has three consumer-oriented devices (excluding its computer lines): the iPhone, the iPad, and the iPod. And since the beginning of fiscal year 2011, the sales paths of these three items have varied widely.

From a units sold basis over the last three plus years there are three distinct stories. If Apple is to turn around a top line that's showing signs of wear by only growing 5.1% over the last four quarters on a year-over-year basis, it really could use a new product to compliment these three devices.. In essence, the chart about tells the story of the good, the bad, and the ugly.

The good: Apple's iPhone
We can say that Apple's iPhone was the strongest performer on both a relative and an absolute basis by growing from 16.24 million in the first fiscal quarter of 2011 to 35.2 million in the recently reported third quarter. However, if seasonality is eliminated by comparing first quarter 2011's 16.24 million to first quarter 2014's 51.03 million and you get an annualized unit growth rate of 46.5%

And more importantly that growth is continuing. In the above chart, you can see that as far as Apple's iPhone is concerned, over the last three plus years there has been no year-over-year decline in units sold.

With that being said, on a year-over-year basis, growth has slowed a bit. Apple's third quarter showed units growing to only 35.2 million from 31.24 million in third quarter last year. That's a 12.6% growth -- still good, but lower than the aforementioned 46.5% figure.

The bad...well, sort of: Apple's iPad
Apple's Tim Cook will quickly tell you that Apple's iPad is the fastest-growing product in the company's history. And he's absolutely right. But if you look over the last three years it is a slightly different story. If you look at the chart you can see solid, albeit not flashy, growth. Growing from 7.33 million to 13.28 million over the last three plus years is good. Comparing the recently reported third quarter unit sales -- 13.2 million -- to 2011's fiscal third quarter -- 9.25 million -- and you get annualized growth of 12.5%. Not iPhone numbers during that same period, but nothing to be ashamed of either.

However, if you look more recently on a year-over-year basis, you see the iPad appears to be slowing considerably -- even reporting unit sales drops. The last two quarters have been rough on the iPad with sales registering lower than the previous quarter in both instances.

The ugly: Apple's iPod
This brings us to the iPod, which is having a rough go on both an absolute and a comparative basis. Virtually forgotten now when Apple reports earnings, many have forgotten Apple's iPod led unit sales as recently as the first quarter of 2011 with 19.45 million units. The product has fallen to a mere 2.93 million units sold among cannibalization from the higher-margin iPhone, scant iterations, and the rise of streaming-based services versus digital downloads.

Where does the iTime fit in
While it is always difficult to speculate on unreleased products, that's never stopped Apple analysts from voicing their opinions. The most bullish opinion comes from Katy Huberty, and estimates that the iTime sells "30 million to 60 million units sold in the first 12 months of availability." If so, that puts Apple's iTime -- at least initially -- in iPad territory as the latter moved roughly 70 million units in the previously reported last four quarters.

On the bearish end of the spectrum is Apple analyst and supply chain guru Ming-Chi Kuo that predicts that supply issues will halt sales, at least initially, and only expects sales through 2014 to run in the 3 million range. He also pushes back the launch date to mid to late November. On an annualized basis, this puts Apple's unit on a run rate of 15 million-20 million and gives the company a moderate success.

Final thoughts
While many fans are excited about the iPhone 6 release, I'm clamoring for new products. Apple's iPhone growth is slowing and in many ways dictated by carriers' upgrade cycles and expansion into China. Many U.S.-based businesses will tell you China is a tough place to do business in and now has a worthy competitor in upstart Xiaomi. In the short run, Apple's iTime can give a boost to Apple's top line and give Apple enthusiasts a new reason to sleep in front of an Apple store for three days again.

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