Apple (AAPL) hosted a special event Monday, March 9, to show off its latest products and developments. The headliner of the event was the brand new Apple Watch, one of the most talked about gadgets in recent memory. Other topics for the recent addition to the Dow Jones Industrial Average index included iPhone momentum, growth in China, Apple TV updates, and the new MacBook development.
Apple’s new MacBook Pro with Retina display looks to improve on the already solid foundation of Apple’s MacBook line. With several innovations, the lightest MacBook model has received solid reviews thus far. Despite the PC market being under pressure, Mac notebooks continue to experience growth. Another popular Apple product receiving an upgrade was Apple TV. With over 25 million users, this product offers programming from leading content providers. An addition to the already extensive list will come this April as Apple reached a deal with HBO NOW, which will be available exclusively in the US on Apple TV and in the app store. Premium programming like HBO is in high demand, and this only strengthens an already-solid offering.
Apple’s flagship product also continues to see growth. The iPhone is growing at a rate almost twice that of other smartphones, by our estimates. This growth has been aided by a 99% customer satisfaction rating, and growth of Apple and the iPhone in China. Apple now has 21 stores in China and has no plans of slowing the pace of expansion in the country for the foreseeable future.
The Apple Watch is one of the most intriguing new Apple products because the firm hasn’t offered anything close to this before. Still, most of the information released at the Apple Watch Event was old news. Pricing and battery life, both causes of concern, were addressed. Prices range from $349 for the Apple Watch Sport to over $10,000 for the 18-karat gold Apple Watch Edition. A range of options depending on size, band material, and function are available from the low-end sport edition to a stainless steel model costing $1,099 at its high end. These options are available in both the 38mm and 42mm sizes. The battery life of the watch on a “typical day” is about 18 hours, so daily charging will be necessary.
A great deal of the upside of the Apple Watch is directly tied to the amount of apps it can support. Some of the app-related features that were shown off include the ability of the watch to open garage and hotel doors, help users bypass hotel check-in lines, and request a ride through Uber. The workout app comes standard on all Apple Watches, and the user will receive health-related notifications based on his or her activity level. Any notification that one would receive on an iPhone 5 or higher can be seen on the Apple Watch. A quick-response options list enables the user to respond succinctly to messages with a tap on the wrist. Apple boasts, “It’s the most advanced timepiece ever created… a comprehensive health and fitness companion.”
With this innovative release, Apple is essentially attempting to create its own market for smart watches. The product may not be immediately attractive to those who already wear watches. Instead the likely target of this product is those who do not typically wear watches but want a fashionable iPhone accessory that can increase their efficiency in daily activities. Apple has a proven track record in situations like this, so it is most likely safe to give them the benefit of the doubt once again. The brand recognition of Apple is unparalleled, and will be a driving factor in the success of the new product.
If Apple can push its new smart watch into relevant use for healthcare providers and researchers, including retrieving and organizing health data and information on how a body is performing in daily activities, it could see more rapid growth than initially projected. Integration of Apple’s recently-developed ResearchKit into future improvements could have great impact. This is not likely for the first generation of smart watches, but it could become a reality as Apple continues to improve its product.
Though the Apple Watch is an innovative product, there are still serious competitors out there. More hardcore fitness enthusiasts may be turned off by the fact that the Apple Watch has a water resistance rating of only IPX7, meaning it is qualified for splash resistance but not full immersion. These ratings tend to have an upward bias, especially as the device ages. Currently-available fitness super watches include products from Garmin (GRMN), Fitbit, and the Timex Ironman, but the Apple Watch’s versatility goes beyond the fitness capabilities of these items. The Pebble Steel, a competing product, appears to be a cheaper, fitness-focused version of the Apple Watch with extended battery life, but we think it lacks the brand-name drawing power of Apple and its incredible app selection. Apple’s new release can do most if not all of the tasks of these fitness smart watches, but Apple is targeting a much more diverse market than these fitness minded competitors.
More relevant competition includes a variety of products from the Android family, providing yet another facet of the all too familiar Apple vs. Android debate. Sony (SNE), Motorola, and Samsung (SSNLF) have similar products, which are generally cheaper than the Apple Watch. Products such as the Samsung Gear S and the upcoming LG Watch Urbane LTE have an edge on the Apple Watch in that they can operate on their own connectivity, away from the linked smartphone. These products both have built in GPS, as does a recent offering from Sony, but this means little more than increased accuracy in route recognition when running or exercising away from your phone.
Not surprisingly, Apple appears to have the edge in physical design. Its smaller face and streamlined design is likely to be more attractive to women as it will appear less bulky on the wrist. The short 18-hour battery life is a small cause for concern, but comparable smart watches typically have battery lives under 24 hours. Apple also claims that it will reduce the redundancy between the watch and iPhones, something competitors have struggled with thus far. The scale-tipper for the Apple Watch comes from its massive app ecosystem. Other smart watch producers have been hesitant to release new apps due to the relatively low number of watches sold, while Apple’s WatchKit SDK continues to develop new apps specifically for its smart watch. Apple Pay, available on the Apple Watch, gives the user the ability to pay at nearly 700,000 locations with a tap of the wrist, a luxury unique to Apple at this time.
The Apple Watch will become fully available in the US, the UK, China, Canada, France, Germany, Japan, and Hong Kong on April 24 and is available for pre-order April 10. Any earnings boost from this release should not be expected until the fourth quarter of this calendar year. Until a proven market for the watches has been produced, expect the performance of Apple to continue to be tied to iPhone sales. After reporting revenue of $74.6 billion in the last complete quarter alone, it will take an incredible amount of watch sales for the new product to make a noticeable impression on revenue. Apple is simply too big for the release of the Apple Watch to have significant impact, at least immediately.
With that in mind, the short-term popularity of the watch could have an effect on Apple and how it chooses to move forward with the product. Keep in mind that this is the first generation of the smart watch. The product will only improve in the future, so immediate criticisms, which have been common on almost all iterations of Apple’s products, should be mitigated in time. Noticeable financial contributions from the new release will most likely happen in coming years, as consumers utilize and adapt to the new features and options available. Though not a large factor in our valuation of Apple, we fully expect the company to continue to innovate and improve the product.
With the Apple Watch, Apple has created a tremendous opportunity to grow the market of wearable technologies that are designed to improve the efficiency of all aspects of a consumer’s life. The versatility of the Apple Watch and its available applications set it apart from competitors, in our view. Brand recognition will be vital in the early stages of this new market, and innovation will be necessary to keep it expanding, both areas of strength at the iPhone-maker. Apple thinks it has another can’t-miss product, and we tend to agree. Still, the Apple Watch will have to gain more momentum before it begins to add significant value to our estimate of Apple’s intrinsic value.