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Is Apple CEO Tim Cook Too Bullish on Apple Watch?

By Jamal Carnette, CFA - Feb 26, 2016 at 10:30AM

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IDC reports Apple Watch did not receive a substantive seasonal sales increase.

According to Apple (AAPL -0.43%) CEO Tim Cook, Apple Watch is doing well. In the company's recent conference call, the CEO noted that Apple set a quarterly record in terms of Apple Watch sales, and recorded a strong December. Apple doesn't specify revenue figures or unit shipments for the device, so investors have to rely on third-party estimates for Apple Watch estimates.

IDC recently released wearables shipments for the fourth quarter. IDC's figures support Tim Cook's thesis that Apple Watch set a quarterly record for unit shipments, but paints a much-less-favorable picture when compared to the company's results in the preceding quarter. Is Cook being too optimistic when discussing Apple Watch?

Not a big holiday lift
IDC estimates that Apple shipped 4.1 million Apple Watches in the fourth calendar quarter. In doing so, Apple takes 15% of the total market, only trailing fitness-tracker Fitbit (FIT), which shipped 8.1 million units.

Apple released Apple Watch in 2015; therefore, a year-on-year comparison does not exist. However, the overall wearables market increased a torrid 171.6% this year. This supports the narrative that Apple is winning significant market share in a rapidly growing market. Overall, this points to a positive catalyst for the company going forward.

Unfortunately, there's a worrying trend in the data that appears specific to Cupertino. Last quarter, IDC reported Apple shipped 3.9 million watches. For a consumer-based product, a 5.1% increase in shipments during the seasonally heavy fourth quarter is well below the total market's 30% growth rate during that period.

As a comparison, market leader Fitbit was able to register 72% higher shipments in the fourth quarter than the one preceding it. But it's not just that Apple Watch trails the overall market; Apple Watch also trails other Apple devices in sequential growth.

Apple Watched underperformed other products
As a consumer-electronics company, seasonality weighs heavily in Apple's results. The fourth calendar quarter, Apple's first fiscal, is by far Apple's highest-grossing quarter. Apple's top line increased from 47% on a sequential basis last quarter, growing to $75.9 billion from $51.5 billion in the prior quarter. Seasonality is heavily reflected in unit shipments, as well:

ProductFQ1/CQ4FQ4/CQ3Sequential Growth %
iPhone 74,779 48,046 55%
iPad 16,122 9,883 63%
Mac 5,312 5,709 (7%)
Apple Watch* 4,100 3,900 5%

Unit figures in thousands. Sources: Apple's quarterly report. *Denotes IDC figures, not Apple's. 

Putting aside the Mac results, which have historically exhibited less seasonality, the iPhone and iPad are tremendously affected by the holiday season, with both exhibiting unit growth rates even above the revenue growth rate. The watch should most likely resemble these mobile devices, so the lack of a noticeable seasonal increase is somewhat concerning for the product. 

It isn't as if the watch is a large part of Apple's revenue haul. Apple reports Apple Watch revenue results in its other products category alongside Apple TV and Beats results. Last quarter, the company reported $4.4 billion in revenue, only 6% of Apple's total revenue haul, from the entire division.

In short, Apple's not dependent upon the watch from a revenue or profit perspective. But if IDC's estimates are correct, it could point to Cook being a little more bullish in his commentary than conditions warrant.

Jamal Carnette 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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