What Happens if Apple Watch Fails?

Source: Apple

Apple's (AAPL -0.81%) Apple Watch is everywhere.

Unfortunately, the company's underwhelming Spring Forward event last week suggests Apple's next great product is more more sizzle than steak.

I've maintained a somewhat skeptical view of Apple's coming smartwatch over the past several months, and I've been far from alone. I think it's worth addressing a significant question that has been largely absent from the discussion. What happens if Apple Watch fails?

How risky is Apple Watch? 
Let's start with the worst-case scenario -- assessing how a complete flop on the Apple Watch's part could impact the company's sales and stock price.

Here are the blended averages for both estimated Apple Watch unit sales and its estimated average selling price (ASP) issued by several prominent analysts following the Spring Forward event (emphasis on the word estimated).

Source: AppleInsider and author's calculations.

Working with the above estimates, here's the potential effect on Apple's overall financial performance if Apple Watch were to sell no units at all.

Source: Apple Investor Relations, Yahoo!Finance, author's calculations. In billions. 

Working within this undoubtedly imperfect analysis, Apple Watch's absolute failure could theoretically shave a mere 4.5% off Apple's top-line fiscal 2015 growth rate, and that's assuming the revenue growth figure I'm using here is updated to reflect analysts' current estimates coming out of this week's event. Given the impressive MacBook and Apple TV news, these estimates might lowball Apple's estimated revenue. Again, this assumes zero Apple Watch sales, which we can probably all agree is far from likely.

It's also worth reiterating here that this analysis features a number of assumptions, some of which will almost assuredly prove inaccurate to some degree in the months ahead. However, rather than getting bogged down in probable specific inaccuracies, it's most important to focus on the big-picture reality this analysis covers. Namely, the Apple Watch really shouldn't impact Apple's financial performance to a significant degree one way or another in the current fiscal year.

Unfazed Apple 
One key to successful investing is understanding what factors most heavily influence the outcomes in question and then focusing primarily on the few drivers that truly matter. In Apple's case, its financial performance can largely be split between the iPhone and everything else.

Source: Apple Investor Relations. In billions.

Obviously, a number of factors are at work here. But the most important takeaway remains that Apple has become increasingly reliant on the iPhone as its main source of sales and profits. Furthermore, with a significant portion of older iPhone users upgrading to the iPhone 6 and 6 Plus this year, the device is likely to dominate Apple's entire fiscal 2015.

The iPhone still needs help 
The current iPhone cycle is great news for shareholders on a number of fronts. However, in the context of this discussion, it's especially fortunate as it buys time for other Apple products (cough: Apple Watch) to hopefully improve enough to entice a mass-market sales base.

Many, myself included, believe the true home-run potential for the smartwatch lies in advanced biometrics, an area Apple has invested in aggressively over the past several years. At present, Apple and other industry players must suffer through some obvious hardware limitations. By far the biggest breakthrough needed to realize this massive potential will come from being able to place a more robust set of biometric sensors onto the inside of the Apple Watch's wristband, which could enable greater health monitoring for key health markers like blood sugar, blood-oxygen levels, and more. However, as you can probably imagine, fitting such powerful sensors into an area as thin as a Watch's wristband comes with its fair share of engineering challenges.

At least one analyst predicted Apple will launch a second edition of the Apple Watch later this year that will actually realize this potential, which would certainly increase my bullishness on the company for 2016. However, as I've sought to demonstrate above, the Apple Watch will almost assuredly remain a drop in the bucket for Apple revenue in the year ahead. Where it goes from there, we can only guess.