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What Investors Should Expect From Apple Inc's Next Smartwatch

By Leo Sun - Apr 13, 2016 at 7:55AM

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Apple’s next smartwatch should arrive soon, but it could be less impressive than you think.

Apple's (NASDAQ: AAPL) next-generation Apple Watch could be an underwhelming hardware upgrade instead of one which changes its appearance, according to KGI Securities analyst Ming-Chi Kuo. In a research note, Kuo claims that the new Apple Watch will feature "spec improvements with limited changes to form factor design," but didn't disclose which components would be upgraded.

Image source: Apple.

That move would be similar to the "s" updates that Apple uses for the iPhone, and indicates that a major upgrade probably won't happen until 2017. It's unclear when Apple will launch its new smartwatch, but many analysts believe that more details will be revealed at WWDC in June.

Underwhelming sales and a price cut
Kuo estimates that Apple only sold 10.6 million watches in the eight months after the device's launch last April. Research firm Canalys claims Apple sold 12 million units, but both estimates fell short of more bullish forecasts. Last May, Morgan Stanley's Katy Huberty claimed that Apple could sell 36 million watches within the first year. But in March, a $50 price cut on the Apple Watch Sport -- which reduced its price to $299 -- strongly suggested that Apple wasn't pleased with the device's sales.

Juniper Research claimed that Apple sold enough watches to capture over half of the fledgling smartwatch market in 2015, but those sales were still dwarfed by its sales of 231 million iPhones last year. Research firm Wristly estimates that the average selling price for the Apple Watch was $529, which means that Apple likely generated between $5.6 billion to $6.3 billion in sales from the device last year. Yet that represents less than 3% of its 2015 revenue, and certainly won't offset weakening sales of the iPhone -- which generated nearly 70% of its revenue last quarter.

On the bright side, IDC reported that Apple finished the fourth quarter of 2015 with a 15% share of the global wearables market, up from nothing a year ago. Much of that growth seemed to come at Fitbit's (FIT) expense, which saw its shares plummet from 43.9% to 29.5% during that period. However, Fitbit's overall shipments still rose 53% annually during the fourth quarter, and the company nearly outsold Apple 2-to-1 by shipping 21.4 million connected health and fitness devices for the full year.

Fitbit's Blaze. Source: Fitbit.

Wild hardware predictions
Kuo hasn't said anything else about the next-gen Apple Watch's hardware, but other analysts have made wild predictions. Drexel Hamilton analyst Brian White claims that the new Apple Watch will be "20% to 40%" thinner than the current version. Cowen and Company analyst Timothy Arcuri claimed that the new Apple Watch would not only be thinner, but also include a FaceTime video camera and expanded Wi-Fi capabilities.

Investors should take these predictions with a grain of salt, but Apple's tradition of slimming down devices indicates that a slimmer Apple Watch could be a possibility. But if Kuo is right about this year's Apple Watch mainly being an internal upgrade, the cosmetic changes could be minor. I personally believe that Apple will make the device slightly thinner and make it incompatible with straps from the first-gen Apple Watch, which would boost ancillary sales of new straps.

Wild 2016 sales predictions
Analysts also can't seem to agree on how many watches Apple can sell this year. KGI's Kuo believes that Apple will only sell 7.5 million watches this year, due to a lack of killer apps, limited battery life, its dependence on the iPhone, and weak mainstream demand. IDC believes that Apple Watch sales will grow year-over-year to 14 million. Pacific Crest's Andy Hargreaves remains more optimistic, claiming that Apple Watch sales will double to 21 million this year.

These forecasts vary greatly because no one seems sure how quickly the wearables market will grow. IDC claims that worldwide shipments of all wearable will rise from 110 million this year to 237.1 million in 2020, but the fact remains that smartwatches still aren't considered as necessary as smartphones. A Kantar WorldPanel survey last November found that just 3% of people in the U.S. owned a smartwatch. 41% of respondents said that smartwatches were too expensive, 33% said that phones did everything they needed, and 32% said that they didn't normally wear watches. Those numbers indicate that soaring sales of smartwatches might be a Silicon Valley fantasy instead of a mainstream reality.

Why Apple investors should care
The Apple Watch's impact on Apple's finances will likely remain minimal for the foreseeable future. However, the watch is symptomatic of Tim Cook's strategy of chasing hyped products like smartwatches and connected cars instead of following Steve Jobs' path of refining existing products into elegant and user-friendly devices.

Apple clearly wants users to buy an Apple Watch, but it's not following Jobs' mantra that "people don't know what they want until you show it to them." Looking ahead, an incremental hardware upgrade probably won't change that widespread perception this year.


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