Apple Inc.'s Fitness Guru Strengthens the Apple Watch Bull Argument

In describing its Watch's disruptive potential within the fitness space, Apple (AAPL 1.27%) bills its latest product as "a smarter way to look at fitness."

Source: Apple.

However, with only limited visibility into the Watch's actual sales volumes, investors remain partially in the dark in assessing whether Apple Watch will ultimately prove as revolutionary as Apple -- and its above messaging -- would have you think.

To get the message out about the impact Apple sees the Watch having on the fitness world, Apple's fitness guru Jay Blahnik recently made himself available for an interview with Outside magazine. Blahnik has been a key contributor to the company's long-term health and fitness efforts, and his commentary likely bodes well for future Apple Watch sales.

Insights from an Apple Watch expert
In classic Apple PR fashion, the interview reads as slightly controlled at times. It brushes up against, but never fully confronts some of the more grating questions the analyst community wants answered. At the same time, though, Blahnik passes along a few interesting insights and thoughts about the direction that this important device class will likely head in future years.

In responding to what he sees as the next major opportunity for the Watch, Blahnik cites Apple's upcoming software update, watchOS 2. This should remedy two of the Watch's most glaring software flaws -- the lack of native app-processing and low third-party app availability.

Eliminating the outsourcing of processing for Watch apps to the iPhone should go a long way toward alleviating the lag in app performance observed in many early reviews of the device. This probably has a greater potential to improve the Watch experience for graphics-intensive applications like games, rather than fitness tracking, which relies on data collection and analysis that athletes can review later.

In discussing the potential for third-party fitness apps to improve the Watch's utility, Blahnik notes:

We realized that we needed to have two apps... That led to Activity and Workout. The next step... is having native third-party apps and giving them access to the sensors... We're not expecting the hardcore cyclists to use our Workout app instead of Strava. If you're really motivated by that app, the last thing we want to do is to tell you to leave.

By enabling third-party apps, like the popular cycling app Strava, to access the Watch's fitness tracking sensors (i.e. heart rate sensor and accelerometer) and integrating them with the Activity app, watchOS 2 will enhance the user experience. This deeper hardware integration should help individual third-party fitness apps provide more relevant user information. It should also help improve the overall macro snapshot of a user's health and well-being in the Watch's native Activity and Workout apps.

Blahnik's commentary focuses on a single vertical: fitness. However, this example should prove emblematic of the way that increased third-party software integration can improve the Watch's user experience across a number of core functions. Looking at past Apple products, iPhone sales only truly exploded when Apple introduced the App Store with the iPhone 3G. It follows that opening up the Apple Watch ecosystem to developers will help increase its commercial appeal, as well.

How well is it selling?
Apple combines Watch shipments into its Other Products reporting segment, so no one knows the exact number of Watches Apple sold last quarter. However, combining management's commentary with some back-of-the-envelope math can help us draw a number of likely conclusions about the Apple Watch's debut.

On the conference call, several analysts posed questions about the Watch's initial performance, and CEO Tim Cook and CFO Luca Maestri indicated that Apple Watch sales "accounted for well over 100% of the growth of the [Other Products] category." 

Not knowing what "well over" the total increase in Other Products revenue means, we can use the category's full increase to find a rock-bottom hypothetical floor for Apple Watch sales across a few potential average selling prices (ASPs).

Source: Apple, author's estimates.

Importantly, for any given ASP -- which Apple hasn't disclosed -- Watch sales came in "well above" these unit sales estimates, based on Tim Cook's commentary. So unless the Watch ASP was extremely high, Watch sales probably exceeded 2 million shipments in Apple's fiscal Q3. And even more importantly, Cook revealed that Apple Watch sales accelerated throughout the quarter, a comment many believe implies that Watch shipments now exceed 3 million units since launching. 

Apple's most successful launch ever?
This brings us to an even more important contextual note regarding the Apple Watch. If the 3 million unit sales estimate proves accurate, then the Watch now holds the crown of Apple's fastest-selling device ever.

Per The New York Times, Apple's CFO Maestri commented that Watch sales exceeded those of the iPhone and iPad in their first nine weeks on the market. Likewise, we know that Apple sold 3 million iPads in its first 11 weeks on the market, which also supports the theory that Apple Watch unit sales surpassed 3 million weeks ago.

That's where the Blahnik interview and the Apple Watch sales-estimate storylines connect for me. As Blahnik correctly notes, watchOS 2 and its likely wave of third-party apps will almost assuredly help increase the Watch's consumer appeal -- and by extension, its sales volumes.

Given our lack of concrete insight into Watch sales, the speculation that Watch sales began dwindling after its initial launch momentum was certainly understandable. However, combining our best estimates of past shipment data and the coming improvements to its ecosystem, it seems that Apple Watch sales could more likely accelerate as we head toward the holiday season.