Will the iWatch Duplicate Apple’s Previous iDevice Successes?

Source: Thinkstock

Source: Thinkstock

For the first time since the debut of the original iPad in 2010, Apple (NASDAQ:AAPL) is expected to enter a new product category this year with the launch of the so-called “iWatch.” The wrist-worn wearable tech device will be Apple’s first entry into the burgeoning wearable tech market that market research firm IHS predicted could grow to nearly $60 billion by 2018. Based on Apple’s impressive track record of success with new product categories, most analysts have high hopes for the iWatch.

On the other hand, without any previous iWatch sales numbers to use as a baseline for predicting future sales, analysts have had difficulty reaching a consensus on how many iWatch units Apple will likely sell in the first year of availability. According to a research note obtained by the Financial Post last month, RBC Capital Markets analysts Amit Daryanani and Mark Sue believe that Apple will sell approximately 50 million devices during the first year of availability. Meanwhile, according to Barron’s, Evercore Partners’ Rob Cihra offered a more conservative estimate of 18 million iWatch units sold during the same time period.

Some analysts have used existing smartwatch sales and various percentages of the iPhone’s installed base of users to calculate their iWatch sales estimates. However, this is an incorrect approach to predicting sales numbers for the iWatch, according to Morgan Stanley analyst Katy Huberty. In a note to investors obtained by AppleInsider, Huberty argued that analysts should instead be looking at Apple’s history of dominating new product categories that it enters, as it did with the iPod in the digital media player market and with the iPhone in the mobile phone market.

Source: iWatch Concept by Todd Hamilton

Source: iWatch Concept by Todd Hamilton

According to AppleInsider, Huberty noted that analysts have historically underestimated new Apple product sales numbers because they have incorrectly compared them to less successful “proxy products” made by other companies, rather than looking at Apple’s own track record of iDevice successes. Huberty also cited the “halo effect” that drives users of the company’s current products to purchase Apple’s new products. This halo effect may be even more pronounced this year due to the iPhone’s increasing brand loyalty that has grown from 73 percent in December of 2011 to 90 percent in March of 2014, according to AlphaWise smartphone survey data cited by Huberty.

“We see a range of 30-60M iWatch unit sales in the first 12 months of availability based on historical penetration of past iDevice,” wrote Huberty in a note seen by Benzinga. Huberty’s sales estimate assumes the iWatch will have an average selling price of $300 and a gross margin between 40 and 50 percent. Based partly on the expected strong sales of the iWatch, the Morgan Stanley analyst boosted her price target on Apple shares to $110 from $99. She also offered a valuation range from $74 to $132 per share based on bear-case and bull-case scenarios, respectively.

Huberty also raised her estimates for Apple’s June quarter with predictions of $37.9 billion revenue, 37.9 gross margin, and earnings per share of $1.24, according to Benzinga. This is at the high end of Apple’s revenue guidance of $36 billion to $38 billion. Huberty also predicted June quarter iPhone sales of 36 million units. Apple will announce its earnings results for the third quarter of fiscal 2014 on July 22.

The potential success or failure of the iWatch is not the only aspect of Apple’s wearable tech product that is being debated by the analysts. While many industry watchers have predicted that the device will be released in October, a recent research note from well-connected KGI Securities analyst Ming-Chi Kuo suggested that mass production of the iWatch would not begin until “mid-/ late- November,” according to 9to5Mac. This revised production date suggests that the iWatch will be in short supply in 2014.

Several media outlets have reported that the iWatch will feature multiple health-monitoring and fitness-tracking sensors that will collect data on everything from calorie consumption to sleep activity. For this reason, it is widely believed that Apple’s recently announced HealthKit data storage platform and Health app will work in conjunction with the iWatch. Other rumors suggest that the device will be positioned as a fashion accessory and will be offered in multiple sizes with sapphire-covered displays.

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