Earlier this week, Global Equities Research analyst Trip Chowdhry put out a research note all about Apple's (NASDAQ:AAPL) new Apple Watch. The Mac maker had just filed its 10-K annual report with the SEC, and Chowdhry is crunching some numbers on how the new wearable device may fare in the coming fiscal year that just kicked off.
Let's see how realistic these figures are.
Here's what we know
For starters, investors do know that Apple's Other Products segment grew by nearly $1.7 billion in fiscal 2015. We also know that in the fiscal third quarter, Apple Watch accounted for "well over 100% of the growth" in Other Products. That means that Apple Watch revenue was at least $952 million. Apple also said that Apple Watch sales were up sequentially in the fiscal fourth quarter, so I think it's fair to say that Apple Watch generated over $2 billion in revenue during fiscal 2015. It's quite possible that sales were notably higher than this as well.
This is after launching at the end of April, although inventories were severely supply constrained until about June. So the device was on sale for just over 5 months of the year. Importantly, there is no holiday quarter precedent, so as little as investors know about Apple Watch sales performance, it's an even bigger unknown how it will fare during the all-important holiday shopping season.
A numbers game
Back to Chowdhry's estimates. The analyst expressed some bullish views after attending various developer events and pointing to some of the benefits of watchOS 2 like native apps and better performance. He believes that Apple Watch will generate $23 billion in revenue during fiscal 2016, followed by $36 billion in revenue during fiscal 2017. For what it's worth, Chowdhry believes that Apple Watch revenue in fiscal 2015 was approximately $4 billion.
For some perspective, the iPad generated a total of $23.2 billion in revenue in fiscal 2015, and Apple's tablet business has been contracting over the past couple of years as the upgrade cycle is still unclear. iPad revenue was down 23% for the full year, and could conceivably continue that trend in fiscal 2016. If Chowdhry's prediction proves accurate, Apple Watch would quickly overtake the iPad in terms of revenue, and could even give the Mac a run for its iMoney.
Here's what we don't know
But frankly, I think these estimates are a little bit too high. Chowdhry is modeling for 43 million Apple Watch units in fiscal 2016 at an average selling price of $530. He then expects Apple to sell 68 million units the following fiscal year with ASPs holding steady. Selling 43 million units sounds extremely optimistic when there are simply too many unknowns at this point.
We have no idea what kind of product cycle Apple will choose for Apple Watch. It could be one year (new model in April); it could be 18 months (new model in October). We don't know what features Apple might put in the new models, which are the most important factors with spurring upgrades and first-time adoption. We don't know if Apple will adjust its pricing strategy, since we don't know how well the current pricing model is working.
In the iPad's first full fiscal year of availability (fiscal 2011), Apple sold 32.4 million units. Recent weakness notwithstanding, the iPad still holds the title of Apple's most rapidly adopted new product. Tim Cook has said that Apple Watch sell-through has been higher than any prior product over the same comparable launch window, so the wearable has a decent shot at dethroning the tablet. But 43 million just sounds like too much.
Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.