Will Apple’s iWatch Be the Next iPad?

Source: iWatch Concept by Todd Hamilton

Source: iWatch Concept by Todd Hamilton

Apple’s (NASDAQ:AAPL) rumored iWatch could match or surpass the sales numbers that the Cupertino-based company achieved with the iPad, according to a recent analysis done by UBS’ Steven Milunovich. In a research note obtained by Apple Insider, Milunovich predicted that Apple could sell as many as 21 million iWatch units in fiscal 2015 and 36 million units in fiscal 2016. Apple sold almost 19.5 million units of the iPad during its first year of availability and 47.6 million the following year.

Assuming an average selling price of $300 and an initial product margin of about 25 percent, the UBS analyst believes that Apple could rake in an additional $6.5 billion in revenue during fiscal 2015. Milunovich expects that Apple will eventually boost its product margin to above 30 percent, allowing iWatch revenue to reach $11 billion in fiscal 2016. “The iWatch could be 30-40bps dilutive to overall margins, resulting in an EPS boost of $0.15 in F15E EPS and $0.30 to F16 estimate or 1-2 points of EPS growth,” wrote Milunovich in his research note, according to TheStreet.

However, Milunovich cautioned that his sales estimates for the iWatch were based on best-case scenarios and that there were many unknown variables about a wrist-worn wearable tech product. “We expect iWatch sales to roughly track iPad unit sales — similar penetration rates would mean higher sales. [The] iWatch might do better because the customer base is larger than when iPad launched and the ASP might be less,” wrote Milunovich, according to Apple Insider. “On the other hand, iWatch is the first product to be worn, which might not appeal to all users.”

Milunovich revised his price target on Apple shares from $700 to $100 based on the company’s seven-for-one stock split. However, while his split-adjusted price target remained essentially unchanged, Milunovich boosted his earnings per share estimates. Milunovich raised his EPS estimate for Apple’s fiscal 2014 to $6.50 from $6.32, while his estimate for fiscal 2015 was boosted to $7.22 from $6.88. Finally, his EPS estimate for fiscal 2016 was raised to $8.15 from a previous level of $7.91. According to TheStreet, Milunovich justified his EPS estimate hikes based on several considerations, including “increasing the contribution of the iPhone 6/6L and estimating their margins; adding the iWatch; reducing iPad shipments; and adjusting for the 7-for-1 stock split.”

Speculation about Apple’s rumored iWatch continues to grow after unnamed sources cited in a recent report from Japan’s Nikkei predicted that the device would be released in October and would feature biometric sensors and a curved organic light-emitting diode (OLED) touchscreen. Apple recently unveiled a health data storage platform called HealthKit and a Health app at the Worldwide Developers Conference. Many industry watchers believe that the new HealthKit platform is primarily intended for the upcoming iWatch. Apple also introduced new Continuity and Extensibility features in iOS 8 that would be ideal for a peripheral wearable tech device like an iWatch.

Although Milunovich did not specifically cite the Nikkei report in his research note, he did mention HealthKit and several other factors that lead him to believe the iWatch will launch this fall. “We are more confident that Apple will be introducing the iWatch before the holiday season following WWDC’s introduction of HealthKit, recent healthcare hirings, the acquisition of LuxVue Technology, and positive comments from Eddy Cue at the Re/Code Conference,” wrote Milunovich in a note seen by Apple Insider. In a video of the conference provided by Re/Code, Cue boasted that “we’ve got the best product pipeline that I’ve seen at Apple in my twenty-five years at Apple.” Assuming that Cue’s statement isn’t just hopeful hyperbole, Milunovich’s iWatch sales prediction appears to have a good chance of coming true.

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