Wall Street is having a tough time figuring out how much the upcoming Apple (AAPL) watch will help the company’s bottom line, but things should become clearer after Monday’s big unveiling.
CEO Tim Cook and his top lieutenants, joined by executives from Facebook (FB), BMW and other Apple allies, are expected to disclose far more detail about the new wearable at a press event in San Francisco. Analysts and investors are eager to hear how Apple is positioning the watch, what it will do and, perhaps most importantly, how it will be priced.
When Cook first announced the watch last September, he revealed only that the entry level model would start at $350. But he didn’t say how much Apple would charge for a mid-tier model and a high-end, solid gold edition.
Shares of Apple climbed to an all-time high of $133.60 just under two weeks ago as investor excitement about the watch hit a peak. Reports that Apple wanted to sell the high-end gold model for upwards of $5,000 sent revenue forecasts skyward.
But since then, skeptics have been chipping away at the bullish watch story and the shares lost 5%, or almost $40 billion in market value, through Thursday's close. As new details come out during the presentation, there’s the possibility for some volatile moves in the stock. The stock was moving higher on Friday -- up 1% to just under $128 a share -- after news that Apple would be added to the Dow Jones Industrial Average index on March 18.
Wall Street forecasts for the watch are currently all over the place, with many analysts expecting 15 million to 20 million watches will be sold this year at an average price of $350 to $400. For a company that had $200 billion of revenue last year, the potential for another $8 billion is a modest increase. There are estimates out as high as 35 million to 40 million watches and as low as 6 million to 8 million.
Even if the watch is a modest success, some analysts doubt whether it can raise enough sales and profit to move Apple’s enormous $740 billion market much at all. Deutsche Bank analyst Sherri Scribner on Thursday forecast that the watch could sell 76 million units and bring in $26 billion annually by 2018, but concluded that would be too little to counteract plateauing iPhone sales. Scribner rates Apple shares a “hold” and has a price target of $110, almost $20 less than the current price.
"While we remain positive on the Watch as a new product category for Apple, and we expect a strong launch, we do not view the Watch as a significant revenue driver for Apple over the next 5 years,” Scribner noted in her report. "Given that more than 60% of Apple’s revenue and a higher percentage of profits come from the iPhone, we expect trends in the company’s smartphone business to remain the predominant driver of the stock."
A test for Tim Cook
Monday’s demo is also a big test for Cook, who took over as CEO after Steve Jobs had already introduced Apple’s last big product, the iPad. Jobs was a master at positioning and marketing, but that hasn’t typically been Cook’s strength.
Ahead of the watch event, Cook has been on a seemingly endless global goodwill tour the past few weeks, giving numerous interviews and dropping in on Apple stores to boost morale. The question is: can he ignite the kind of excitement and fervor to buy a new gadget that was Jobs’ forte? Cook may pass that role to another Apple executive, perhaps Phil Schiller, the head of marketing, or Craig Federighi, head of software engineering.
Apple has already said the watch will require an iPhone for many applications and will offer health monitoring and fitness functions. It will also be able to make wireless payments using the company’s Apple Pay system. Cook revealed in an interview with The Telegraph newspaper last week that the watch is designed to replace car keys, perhaps explaining BMW’s participation at Monday’s event. While the battery will only last about a day, the watch will charge more quickly than an iPhone, Cook said.
As is often the case for Apple, the watch will arrive after many competitors have already been in the market offering their own take on a smartwatch, though none have taken off yet. Only 4.6 million smartwatches and wearables shipped last year, including just 720,000 running Google's (GOOGL) Android Wear software, according to market tracker Canalys.
At the Mobile World Congress show in Barcelona this week, there were literally dozens of smartwatches and wearables on display, from every company you can think of – high-end models from Sony (SNE) and LG Electronics, devices from retailers like Guess, even some good-looking watches from companies generally thought of as low-end gadget makers, like Chinese electronics giant Huawei.
But if history is any guide, the biggest hurdle for the Apple watch won’t be the older models from competitors. Rather, Cook's challenge will be to attract enough consumers to create another blockbuster for Apple.