There has been a lot of interest in Apple Watch since it was announced last week. The two big questions for investors are
- How many will Apple sell? and
- What will the average selling price be?
An article at Seeking Alpha by Stone Fox Capital make the argument that it will likely not move earnings significantly.
They note that, with revenue close to $200 billion next year, the Watch would need to sell $22 B in order to account for 10% of the total.
Additionally, they note that Citigroup estimated Apple will sell 14 million units next year. They then go on to calculate out at a price of $349.
If my calculations are accurate, Apple must sell roughly 55 million watches at the average low-end price of $349.
While the writer’s point is made, the price is obviously absurd. This is the base price and we all know that it will only go up from there.
So, I have made some projections of price points and percentage of sales in each range. I created what I see as reasonable ranges for low, middle, high and ultra-high ranges, and I believe the distribution curves are both rather reasonable. In each price range I have expected that the average price is closer to the bottom than the top.
First I do a conservative estimate using the 14 million units estimate.
Next I have a bit more generous estimate with both 20 M units, and a slightly higher mix.
Finally, Stone Fox says:
The relatively low volumes and customizable sizes, versions and straps are all likely to pressure margins including leaving the company susceptible to inventory gluts in certain versions not demanded by the market.
I agree that lower volumes (compared to iPhone) raises the development costs as a percentage of each unit. I also agree that excess inventory in some units would reduce margins. But this latter point is probably not a significant factor for the watches themselves since Apple usually sells well, and their production organization is such that they can quickly adjust production mix to meet demand. This is one reason they like to do pre-sales. It allows them to get an early view of the customers’ preferences.
As for the multitude of bands, and other accessories, the markup on these items is typically enormous so we should not fear any margin pressure from these. On the contrary, they will increase margin significantly.
Quoting sources at LF Displays, DigiTimes reports:
Apple will receive about five million AMOLED panels for the device a month throughout 2015, with the Apple Watch expected to be released within the first quarter. The sources said Apple aims to sell upwards of 50 million Apple Watches in 2015.
This would be over $25 Billion by my second table, and would solve a lot of Stone Fox’s lack of number cutting margins problem.
On the other hand…
I have been reading the very provocative Daring Fireball article by John Gruber on the Apple watch. Among many other things, he predicts pricing as follows:
- Apple Watch Sport (aluminum/glass): $349 (not a guess)
- Apple Watch (stainless steel/sapphire): $999
- Apple Watch Edition (18-karat gold/sapphire): $4,999
In reality, however, he believes it may be higher:
Most people think I’m joking when I say the gold ones are going to start at $5,000. I couldn’t be more serious. I made a friendly bet last week with friends on the starting price for the Edition models, and I bet on $9,999.
Remember, there may be $1000 or more of value in the gold alone.
His arguments have led me to think that the second set of estimates is really a middle ground. I am posing a new set with an ultra-high-end category. The numbers, while higher, is not really stratospheric. In fact, if the gold watch starts at $10,000 (I assume one does not wear gold with a plastic sports band) then the ASP for this category might actually be low.
Finally – here is the same projection but with 50 million units sold as noted in the DigiTimes article, with a boost in ASP for ultra-high-end. This gives me a case that I think is bullish – but only moderately so.
The 50 million even at a lower $600 ASP would add $30 B to Apple’s revenue. Perhaps the final projection is just a bit high. To be honest,while I have no doubt that some people might spend $10,000 on a gold Apple Watch, it is hard to imagine 200,000 people doing so. But even if you dropped all of these buyers, you would still have about $30 B in revenue.
Even at a conservative 20% net profit margin, this would add $6 B to the bottom line or something roughly $1 annually to EPS. That is significant!
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