The Apple Watch is selling briskly, and at least one Wall Street analyst thinks it's going to be a major driver for Apple's (AAPL 1.12%) bottom line. CLSA's Avi Silver feels that the game-changing smartwatch will eventually become Apple's most profitable product line.
Right now, the proposition might seem outlandish. Initial bugs could be holding back demand, just as supply constraints are holding back the actual units available for sale. In fact, Silver's otherwise bullish note is accompanied by the realization that his initial goal of Apple selling 20.5 million smartwatches in its fiscal year ending in September is too ambitious. He's lowering his forecast to just 16 million Apple Watch devices in fiscal 2015. His target of 35 million smartwatches being sold in fiscal 2016 remains unchanged.
There's no denying that the Apple Watch is a hit, even though it has run into a few bumps early on. However, it seems a bit extreme to think that it will be more profitable than the iconic iPhone.
New eggs in the iBasket
It's great that Apple's making some serious noise in the previously treacherous smartwatch market. It was a couple of years late to the niche, but once again, Apple has proven itself to be the tastemaker that will educate the market. The smartphone wasn't a hot consumer product until the iPhone arrived, and nobody seemed to think they needed a tweener product like a tablet until Steve Jobs informed the masses that iPads were cool. It's happening again with the Apple Watch.
That's great, and with Apple generating two-thirds of its revenue -- and likely a greater chunk of that when it comes to earnings -- from the iPhone, it would be great to see some diversification of the revenue mix at the world's most valuable consumer tech company. Macs are gaining market share, but we've probably seen the iPod and the iPad peak in popularity. The Apple Watch could be the key to kicking up growth to a new level, especially as both an attraction and retention tool for iPhone switchers and users.
It's also important to be realistic, here. The Apple Watch is highly unlikely to ever sell as well as the iPhone, especially as long as it's restricted to owners of the more recent iPhone models. After all, Apple already sold 135.6 million iPhones through the first half of fiscal 2015, that's four times as many smartwatches as Silver sees Apple selling for all of fiscal 2016. Folks are open to upgrading their iPhones every year or two, but the same dynamic won't exist with pricey wristwatches. Domestic wireless carriers don't have a problem shaving hundreds of dollars off the iPhone to subsidize folks on two-year contracts, and that's just not going to happen for the Apple Watch. In short, the less expensive Apple Watch is going to always sell less than the more expensive iPhone. How could it be more profitable?
Oh, right, Silver didn't mean total profitability. He meant profitability as in profit margin. Right, about that. Remember when Apple got early adopters to pay $599 for the first iPhone and $499 for entry-level iPads? It was a harder sell after the first wave of buyers, forcing Apple to work closer with carriers on iPhone subsidies, and it quickly introduced the cheaper iPad mini.
In other words, if Apple Watch is still a hit a year or two from now -- and there's no reason it won't be -- it probably won't be as expensive. Just as the iPad educated the marketplace and opened the floodgates to cheaper tablets with more competitive markups, the Apple Watch in the future may not be all that different than the iPad of today, where we're talking about older models and cheaper versions to keep sales humming along.
Apple investors won't mind if the tech giant sells far more iOS wrist huggers at lower price points. However, the assumption that the Apple Watch will ever be as profitable as the iPhone -- whether we're talking about total earnings or even profit margins -- will probably never be true.