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Why Investors Shouldn't Panic About Apple's Smartwatch Share Loss

Ashraf Eassa, The Motley Fool

One product line that has proven to be a runaway success for Apple (NASDAQ: AAPL) is the Apple Watch. Many competitors had launched multiple smartwatch generations before Apple debuted its first, but it still managed to grow the total addressable market (TAM) and, along the way, become the dominant smartwatch maker by unit shipments and revenue.

According to a press release from Strategy Analytics, Apple shipped 22.5 million smartwatches in 2018, up 27.1% from the year prior. However, Strategy Analytics' data also shows that Apple's share of the overall smartwatch market dropped to 50% in 2018 from 60% in 2017.

A person skiing while wearing an Apple Watch.

This Apple Watch wearer is going downhill, but Apple's smartwatch business isn't in a slide. Image source: Apple.

Should investors worry that Apple is losing its grip on this market? Here's why I don't think so. 

A significant distortion

According to Strategy Analytics, Apple's share loss came as Fitbit (NYSE: FIT) expanded its share from 1.7% in 2017 to 12.2% in 2018. Samsung (NASDAQOTH: SSNLF) saw its smartwatch share rise to 11.8% from 10.6% in the prior year. Strategy Analytics' data shows that all other smartwatch makers, in aggregate, saw their unit shares drop somewhat. 

Now, based on these numbers alone, you might ask, "Is Fitbit crushing Apple in the smartwatch market?" 

The answer to that is, "No, not really."

For its fiscal year 2018 -- which ended on Dec. 31, 2018 -- Fitbit reported revenue of $1.51 billion, which was down significantly from $1.62 billion in the prior year. The company lost money ($185.8 million, to be precise) and saw an overall reduction in unit shipments from 15.3 million to 13.9 million. 

What's happening here is simple: Sales of the company's fitness trackers -- devices that are less functional and cheaper than typical smartwatches -- have been on the decline, and that shipment decline has been partly offset by sales of the company's own smartwatch products. Indeed, the company said that in 2018, 44% of its revenue came from smartwatches, up from just 8% in the prior year. 

So, since Fitbit is essentially replacing lost sales of fitness trackers (which don't count as smartwatches for Strategy Analytics' purposes) with its smartwatches, Fitbit has seen its share of the smartwatch market soar. The company's share of the wearables market, on the other hand, is likely down, considering that its total device shipments were down year over year. 

Is Fitbit even competing with Apple?

If you go to Fitbit's website, you'll see that the company's cheapest Fitbit, the Versa, sells for $199.95; the more expensive Ionic sells for $269.95.

Apple's cheapest Apple Watch, a GPS-only Apple Watch Series 3, starts at $279.99. Apple offers newer Apple Watch variants with features like premium stainless steel casings and cellular connectivity for up to $849. 

Apple also sells bands for its watches for as much as $149, something that undoubtedly helps boost the company's overall watch-related revenue. 

The reality is that it doesn't look like Fitbit is actually denting Apple's watch business. Indeed, as Strategy Analytics' data shows, the Apple Watch continues to enjoy strong growth in unit shipments even in an increasingly competitive market. And, frankly, the large decline in Apple's smartwatch share seems more a function of the significant increase in the TAM as a result of Fitbit shifting its product mix from fitness trackers to smartwatches, rather than some fundamental disruption of Apple's business. 

It's also telling that while Fitbit's total revenue in 2018 was just $1.51 billion, Apple CFO Luca Maestri said on the company's most recent earnings call that Apple's wearables business is "approaching the size of a Fortune 200 company." (Put another way, that means it's getting close to generating $14.6 billion in annual revenue.)

Not all of that revenue comes from the Apple Watch (wearables also include the company's AirPods line of wireless earbuds as well as its Beats family of headphones), but I'd be willing to bet that Apple's smartwatch revenue share relative to Fitbit is far greater than its unit share. 

So, relax, Apple shareholders: Apple's smartwatch business is still doing phenomenally, and the apparently large drop in unit share isn't actually cause for alarm or, frankly, even concern.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.