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Is This Why Apple Inc. Isn't Releasing Apple Watch 2 Until the Fall?

By Ashraf Eassa - Jan 26, 2016 at 10:30AM

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Apple may need this key technology to enter mass production before it can begin building Apple Watch Mark 2.

There had been reports previously suggesting that Apple (AAPL -0.14%) planned to release an all-new Apple Watch, dubbed the Apple Watch 2, in the Spring. However, more recent reports suggest that the iDevice maker will hold off until this fall in order to deliver a completely revamped Apple Watch.

In this article, I'd like to explain why I believe that Apple might be holding off to launch this second generation Apple Watch.

The answer may lie in the chips
The previous generation Apple Watch uses a system-in-package known as the Apple S1. At the heart of the S1 is an Apple-designed applications processor. Not too much is known about it, but according to an analysis performed by AnandTech, it probably features a single-core Cortex A7 processor running at just 520MHz.

The device is also believed to feature a relatively dated GPU block from Imagination Technologies (NASDAQOTH: IGNMF).

All of this of course is built on Samsung's (NASDAQOTH: SSNLF) 28-nanometer LP process, per AnandTech.

In order for Apple to deliver a big boost in performance/features, I believe it will need to migrate to a 14/16-nanometer FinFET class manufacturing technology. Not only should the area shrink delivered by these technologies allow Apple to pack more functionality into the chip, but the transistors themselves can switch quicker, allowing the chip to run at a higher speed.

So, what does this have to do with the Apple Watch 2 timing?

What process would an S2 chip be built on?
I believe that Apple will build the applications processor that will be at the heart of the S2 system-in-package on TSMC's (TSM 1.53%) 16FFC technology. This is said to be a "compact" (read: lower cost) version of the higher performance 16FF+ technology that TSMC builds some of the Apple A9 and all of the A9X chips on.

TSMC has also been pitching this technology as ideal for wearable applications.

According to TSMC on its most recent earnings call, it will begin volume production on 16FFC later this quarter. Given that DigiTimes says that the second generation Apple Watch will go into production in the second quarter, this timeline lines up nicely.

Apple Watch 2 may not help much in FY2016, but should be a growth driver in FY2017
Given the apparent launch timing of the second generation Apple Watch, it is unlikely to have a material impact on the financials in the current fiscal year -- the first generation Apple Watch will have to hold the line for the time being.

The good news is that by pushing the meat of the Apple Watch 2 ramp into fiscal year 2017, Apple should have a number of really interesting growth drivers working for it. The next generation Apple Watch should do better in the marketplace than the first generation has and will, and Apple should also enjoy a year-over-year revenue boost associated with iPhone 7/7 Plus in that fiscal year.

Although fiscal year 2016 is looking as though it's going to be a rough one for the iDevice maker (and I'm putting it mildly), fiscal year 2017 could be Apple's best yet from a total revenue and potentially a profit perspective.

Ashraf Eassa has no position in any stocks mentioned. 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.

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