Apple IWatch: What Will It Cost?

26 March, 2014

© 2014 J. M. Manness

The beauty of Apple’s (AAPL), from an investor’s point of view, is that they have, over the last fourteen years created new gadgets that have each become almost a necessity in our lives. For over a year now we have been hearing rumors of a forthcoming iWatch. We hear rumors of sapphire displays, curved displays, biometrics, health sensors, and more. While evidence mounts for some of these rumors, we are all unsure as to what it will bring, if it comes at all. For the investor, however, the specific features are less important than what this new product will contribute to the bottom line. In this article I will analyze what we can expect from price points. In a companion article I will see if we can come up with some idea as to the market for such a device. Samsung (OTC:SSNLF) has recently released its smartwatch, the Galaxy Gear that runs the Android operating system by Google (GOOG). It has a price of $299, which seems like a reasonable price to expect from Apple. Apple is famous for their high margins so let’s see if Apple can match that price given the margins they want. To do so, I have used the build of materials costs as estimated by IHS. The table shows the IHS figures for the iPhone 5s, and my estimates for correlating costs for the new iWatch. iWatch-cost-analysis

 A line by line discussion of the cost structure is given in a separate post.

Processor – A8w

One thing that should be discussed is the processor. I believe that a new processor is being developed to going to this product. I am calling it the A8w. The reason for this processor is that they need a processor which is powerful yet small and has very low power consumption. So this will be produced on the new 20 nm chip processing technology. The regular A8 will be for larger products so the A8w will be a much smaller cousin. In particular, the smaller chip Will have greatly reduced graphics processing systems built in. Additionally, it will be beneficial to have the chip running a 64-bit architecture so that Apple will need only one iOS code-base. (it will, of course, be only a subset of the full iOS.) To my mind, this is one very important reason that the iWatch is not yet out. It is waiting for a processor that is capable and power efficient and small enough for the application. This is one thing Apple does well (at least most of the time): note release things before the proper technology is available.

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Bottom line

As you can see, the total projected cost Will be quite a bit less than the iPhone. Figure I come up with is a total BOM cost of just $71. If we want the same gross margin for the iWatch as for the iPhone 5s (16 GB), then it can sell for as little as $249, fifty dollars less than the Galaxy Gear. Of course, this does not including the development costs which must be exorbitant. So perhaps they will stay with $299 anyway. Of course it maybe possible that there are other expenses than I have not anticipated. Still, this seems a reasonable estimate of what it will cost to build the new iWatch.

Conclusion

Apple’s stock price is stalled. Revenue growth has slowed significantly from earlier years, and many investors do not see Apple as a growth stock any longer. While many argue that Apple is undervalued even for current revenues and income, others see a danger of the iCompany losing even more ground to competition, if not in unit sales, then to decreasing margins. New devices are critical to the stock price. Outside of the leadership, no one knows for sure if an iWatch is in the works or not, and if so then what features or price structure it will have. Here I have shown at least that Apple could produce an iWatch at a competitive price and keep its high margins. A follow up post will cover just how many iWatches we could expect to see sold, and how much that would add to revenue.

UPDATE: 25 Oct., 2014

[I have fixed a few typos above.]

This was, of course, early speculation. I was right about a separate processor (yes I originally meant 64-bit since I said it would be the same.) Of course we do not know if this is true until Chipworks pries it open.

I think my cost analysis is reasonable accurate but only for the electronics. The added costs for the housing, etc. will be additional. Still, I think Apple will not be doing badly with their base price of $349, and higher priced models will definitely contribute to the bottom line. Of course this does not account for development costs which assuredly have been astronomical.

The apparent success of Apple Pay may turn out to be a huge driver for the Apple Watch.

===== Related Articles:

Detailed line item description of iWatch costs

Apple’s A8 — What It Will Be And Why It Matters

Cost Analysis for iWatch – Details

There has been much speculation on the release of an iWatch. Here I show my analysis of possible costs. I start with data from iHS breakdown of the iPhone 5s costs, and go from there.

This section covers details of the costs, while a complete discussion is in the main article.

iWatch-cost-analysis We should start with the cost drivers going through them by number.

9 – NAND

The Gear has 4 GB memory, I see no reason why Apple’s watch should have anymore.

10 – DRAM

Apple can save here. The watch will not be performing large calculations not rendering large images or videos, so large amounts of DRAM would be superfluous.

11 – Display

Much smaller screen will be a lot cheaper.

12 – Processor

I am calling the processor for the iWatch the A8w. The reason for this, is that I believe the I watch will need the newer 28nm process.

13 – Cameras

A 2 MP camera should be sufficient for the iWatch. There is no need for any greater resolution since the user will have his iPhone with him.

14 – Wireless

The watch will not need to have cellular connectivity.

15 – Sensors

I am not sure if the watch will have touch ID fingerprint sensor or not. It is rumored to have several health sensors, But that remains to be seen.

16 – Communications

The iWatch needs to communicate with me iPhone to which is paired. Therefore it will need at least Bluetooth but neither GPS nor Wi-Fi etc. As in the iPhone.

The rest

The rest of the items pretty much speak for themselves smaller battery fewer electromechanical sensors and there will be no need for charger in the box contents.

A complete analysis of the price structure and more details of the processor are here.

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Apple – Absurd Report Attacks Tim Cook

Preliminary post

In my article for Seeking Alpha, I outline all the fallacies of a recent report by Global Equities that called for the firing of Apple CEO Tim Cook. Virtually every point they made was at best forced, and at worst totally false.

One point that I make is that is is extremely contrived for them to take Apple’s Sept. 2012 high of $702 as the starting point for all analysis. Here I present several charts that illustrate my point. (I feel that these would encumber the SA article that had several other points to make.)

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This is Global Equity’s chart showing 23% fall from 2012 high. But there are several other starting points that make just as much sense. It is very contrived to insist on this as the only one from which to calculate Cook’s “destruction of shareholder value.” According to the report, Cook and Oppenheimer solely responsible responsible for the decline. (I address other issues in my SA article.)

Screen Shot 2014-03-09 at 11.06.50 PM

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Cook’s first day

One very reasonable date to select as a starting point would be the day Cook officially took office as CEO. From Sept. 12, 2011, Apple’s performance shows a different picture. While it still lags the NASDAQ and the S&P, a 40% rise is not so bad. One could make a good argument that this is indeed a much better judge of his performance.

Screen Shot 2014-03-09 at 10.55.29 AM

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Or how about the last twelve months? This is a common time frame.

Here, up 23%, Apple has not performed that badly at all. It still lags the NASDAQ, but beats the S&P.

Screen Shot 2014-03-09 at 11.31.35 AM

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Competitors

Here we see it against some competitors over past 12 months. Not particularly good, but should an investor complain about a 23% rise, especially with a large dividend?

Screen Shot 2014-03-09 at 11.41.36 AM

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Recent low

In this final chart we look at performance from the low point on June 27, 2013. Since then, Apple has actually led the whole pack, beating even Google with about 38% rise in value!

And why not pick the low point? You may argue that this price is contrived, but is it any more contrived than Global Equity’s picking the high point?

Screen Shot 2014-03-09 at 11.43.56 AM

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Caveat Emptor!

My point is simply this.

Charts are very helpful to illustrate a point, and there is nothing inherently wrong in selecting a particular chart to illustrate your point. That is what they are for.

The reader, however, needs to look at a chart and decide for him- or herself 

    • if that chart is a valid representation of reality, or
    • if it is selected solely on the basis of fitting the argument.

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