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Why Apple Watch Sales Could Soar With This FDA Plan in Action (AAPL)

Brad Moon

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Apple Inc.’s (NASDAQ:AAPL) Apple Watch has been what is probably best described as a modest success. On the plus side, it has absolutely dominated the smartwatch industry, leaving casualties like Pebble in its wake. Apple Watch sales have been strong enough to disrupt the entire wearable market, causing headaches for long-time leaders like Fitbit Inc (NYSE:FIT).

Why Apple Watch Sales Could Soar With This FDA Plan in Action (AAPL)
Why Apple Watch Sales Could Soar With This FDA Plan in Action (AAPL)

Source: Apple

Yet Apple’s smartwatch has failed to deliver the kind of numbers many analysts and investors were hoping for. A new initiative from the Food and Drug Administration could change that, by making it easier to certify digital health devices.

The FDA move could pave the way for the rumored Apple Watch for diabetics, blowing open the market for AAPL’s smartwatch from tech early adopters to hundreds of millions of people in need of blood glucose monitoring.

Apple Watch Sales No. 1, But Lower Than Hoped

When AAPL launched the Apple Watch in 2015, many analysts were predicting big numbers. Some expected Apple Watch sales for the first year could top 40 million. Apple never released official figures, but industry estimates put the actual number at 12 million.

That’s better than anyone else selling a smartwatch (by a long shot), but not the kind of numbers to represent a meaningful revenue boost for AAPL. The company has since had success in eating into the overall wearables market by pivoting to focus the Apple Watch more at the health and fitness crowd, but the big numbers still elude it. The mass market just doesn’t seem to see the need for a smartwatch.

Will This Ignite Apple Watch Demand?

When AAPL released the Apple Watch, it included a heart rate sensor. It has proven extremely accurate in testing, recently coming within 2% of the numbers reported by an electrocardiograph (EKG). However, AAPL has never marketed it as a medical device, because doing so would mean FDA certification.

Once under FDA regulation, the company would have to get each Apple Watch certified, in a process that could require months. Having to go through FDA certification would also reveal AAPL’s products before release — something the secretive company would hate — and could delay rolling out software updates. In short, even though AAPL could potentially move a lot more Apple Watch units by marketing them as medical devices, the cost of FDA red tape makes that strategy quickly lose its appeal.

However, the FDA just announced its new Digital Health Innovation Plan, and it could change everything.

Noting that digital technologies used in consumer devices “have the power to transform health care,” the agency is trying to streamline the process needed for FDA approval. With a fall target for the pilot program, the FDA says it’s considering creation of a:

“Third party certification program under which lower risk digital health products could be marketed without FDA premarket review and higher risk products could be marketed with a streamlined FDA premarket review.”

The implications for AAPL and the Apple Watch are huge. The company has been working on a non-invasive (i.e., needle-free) glucose monitor for the Apple Watch. If it is successful in overcoming the considerable technical hurdles, there has still been the question about FDA approval hanging over the project. In all likelihood, AAPL would have had to market any such sensor as an add-on accessory in order to prevent FDA regulations from disrupting Apple Watch releases and watchOS updates.

However, under the FDA’s Digital Health Innovation Plan, AAPL could integrate advanced health sensors — like that blood glucose meter — into its smartwatch. That could transform the device from being a nice-to-have gadget and fitness tracker into one that also offers medical support. An Apple Watch for diabetics would be huge, with hundreds of millions of people suffering from the disease. An aging population looking for more proactive monitoring of their health would be another massive potential market.

Health insurance companies and medical facilities would also likely take a close look at covering the Apple Watch as an FDA-approved medical assistance device. An Apple Watch isn’t cheap, but a blood glucose kit costs money too, and the test strips are an ongoing cost — over time, an Apple Watch would likely cost insurers less, while offering additional health benefits like heart rate monitoring. That could put the Apple Watch on the wrists of people who wouldn’t have bought one on their own.

In short, being able to avoid the current FDA certification and gaining medical monitoring capabilities could see the potential market for AAPL explode, with Apple Watch sales taking off.

The FDA is currently in the process of designing its pilot program, and AAPL is still working on that blood glucose sensor. However, new doors are opening and the potential is there for even those overly optimistic early Apple Watch sales predictions to end up being low in the long-term.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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