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Could Apple, Inc. Really Have Sold 5.1 Million Apple Watches Last Quarter?

By Evan Niu, CFA - Feb 19, 2016 at 2:20PM

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The numbers don't add up.

Image source: Apple.

Market researcher Strategy Analytics has just released its estimates on the global smartwatch market for the fourth quarter. Perhaps the most important high-level trend is that smartwatches overtook Swiss watch shipments during the quarter, potentially marking an important turning point in the age-old industry.

The growth was largely being driven by Apple (AAPL 2.14%).

Can I get your digits?
Here are Strategy Analytics' estimates on each category. The researcher estimates that Apple grabbed 63% of those smartwatch units, with Samsung (NASDAQOTH: SSNLF) scoring 16%, which translates into 5.1 million units and 1.3 million units, respectively.

Category

Q4 2014

Q4 2015

Smartwatch

1.9 million

8.1 million

Swiss watch

8.3 million

7.9 million

Data source: Strategy Analytics.

That means that the two frenemies combined took home nearly 80% of the global smartwatch market during the fourth quarter. Compare that duopoly to the combined 40% market share that Apple and Samsung had of the smartphone market in the fourth quarter, according to IDC estimates.

A numbers game
This leads to the next question: is 5.1 million Apple Watch units realistic? We know that Apple's "Other Products" segment generated $4.35 billion in revenue during the fourth quarter, which was up 62% year-over-year. As usual, Apple continues to be opaque about Apple Watch sales for competitive reasons, but the company did say that much of that growth was attributable to "the growing contribution from Apple Watch."

I've always operated on the assumption that Apple Watch average selling prices are right around $500, give or take $50 perhaps. Until Apple opens up and proves me wrong, I will continue to operate on that assumption. Hard to tell when the pricing spectrum for the product ranges from $350 to $17,000.

At a $500 ASP, 5.1 million units would translate into $2.55 billion. In dollar terms, Other Products grew by $1.66 billion in the fourth quarter, so Apple Watch would comprise more than 100% of that growth. That's not too far fetched, since it's happened before and Apple Watch growth is offsetting declines in categories like iPods.

Too much, too fast
However, I still think that 5.1 million units is too high of an estimate. Even if we brought the ASP down to $450, that would still be $2.3 billion in Apple Watch revenue.

iPod sales are so small nowadays that the revenue base probably doesn't have much downside, so it's hard to imagine iPod revenue declines are that meaningful anymore. The last time that Apple disclosed iPod revenue was Q3 2014 when it brought in just $410 million in iPod revenue. We also know that Apple TV saw record sales in the fourth quarter, which should be giving Other Products additional uplift. Beats is in there, too.

I don't believe Apple sold 5.1 million Apple Watches over the holidays. I also didn't believe Strategy Analytics' estimate of 4 million Apple Watches in Q2 2015, since it implied an incredibly low ASP. Just to fill in the gap, Strategy Analytics estimated that Apple sold 4.5 million Apple Watches in the third quarter, which would bring its 2015 total to 13.6 million.

Apple Watch is undoubtedly dominating the smartwatch market, but those figures are still too high.

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.

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