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TheStreet Open House

Here's Why an Apple iWatch Will Be a Big Hit With Consumers

Stocks in this article: AAPL

NEW YORK (TheStreet) -- I've read a number of columns -- including one at TheStreet by my friend Rocco Pendola -- about why an iWatch from Apple (AAPL) would be a bust.

I'd like to take the other side of the argument and explain why the iWatch would be a big hit. (Remember, Apple has yet to announce such a product, but there has been plenty of detailed reporting by reliable news organizations suggesting a launch is planned for later this year.)

  1. How other smart watches have done so far has no predictive value for how Apple's smart watch will do. We've seen this movie before. Hyper-skepticism greeted the "Jesus Phone" -- otherwise known as the iPhone -- back in 2007. People argued that Apple had no appreciation for how to sell phones through carriers. Even more skepticism greeted the iPad. Many scoffed at the name at launch. Several pointed to the poor results of other companies' tablet introductions, some of which were rushed to the market to beat Apple's tablet on to store shelves. Yet people proved that they only knew they wanted the iPad once they saw it and tried it in action. Why wouldn't the same be true with the iWatch?
  2. People don't know what they want until they use it. We can do all the surveys of potential customers that we want. We can say: "Do you want to buy Apple's iWatch, which we think will retail for $350?" But how can anyone really answer this question? They might think they know what an iWatch is going to be, but of course they have no idea. Apple has always had it in its DNA to figure out what customers want rather than asking them what they want. It turns out that customers have no idea what they want. The only thing they know about smart watches so far are things like Pebble and Samsung's Gear watch. But Apple's version will probably be much different from either of those offerings.
  3. Even so, there was a recent survey that said 14% of "watch wearers" would pay $350 for an iWatch. This is bullish for Apple. Who is a watch wearer? It's probably a minority of the population now. Tim Cook himself said at the D conference over a year ago that the most popular watch these days for telling the time is the smartphone. So, whoever is still wearing a watch is probably a consumer that is older and more stuck in the past rather than the most technology-savvy person. Even so, 14% of these fuddy-duddies said they'd buy the new iWatch, sight unseen. Again, if history is a guide, once people actually see the Apple iWatch in action, they'll find it much more appealing than they think it is going to be. Let's assume that once folks see it, double the surveyed number will want one. That's 28% of about one-third of the population who still wears a watch. That's about 30 million potential iWatch sales just in the U.S. What would constitute a good iWatch launch? Apple has suggested it is making 5 million iWatches for the initial launch.
  4. The big opportunity for Apple selling iWatches is not current watch users but current iOS users. Let's face it, anyone with a current iOS device is going to be very interested in adding the iWatch to his or her collection. Presumably it will be well-stitched to the iPhone and other iDevices coming online such as stuff in the car and home. Apple is selling about 200 million iPhones a year. Can it sell about one-third of those buyers an iWatch? That's another 67 million iWatches a year, right there.
  5. If you believe it's possible that Apple can sell 80 million iWatches in its first year, that would be a huge success in comparison to its other products. The poor old iPods are now down to selling about 10 million units a year. The iPads seem to have hit a wall in terms of new growth and are now selling about 60 million a year or 200 million units since they launched.
  6. Even if Apple can sell only 30 million iWatches in the product's first year, it would be a big revenue contributor to the company. The consensus thinking seems to be that iWatches will retail for around $350. I'm not sure it will be that high. Let's say it's only $250 a phone to make it more attractive. At 30 million units, that's $7.5 billion in incremental revenue for Apple. Apple is doing about $175 billion a year in revenue. So that's about an increase of 4.2% in Apple revenue thanks to the iWatch. That might not sound like a lot to you but it would be needle-moving number. Basically, it appears that Apple should be able to sell just as many iWatches annually as it sells iPads. If that's true, that's a home run new product introduction.

Obviously, the proof will be in the final product. If it's good and is a must have, it's another huge new revenue stream that Apple's created from thin air. What's more, all the critics who now say "why would I want to check my email on my wrist?" will realize that the product delivers far more value.

That would be typical Apple.

Why Developers Prefer Apple Over Google

Here's How Much the iWatch Will Cost


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AAPL's revenue growth has slightly outpaced the industry average of 2.4%. Since the same quarter one year prior, revenues slightly increased by 4.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although AAPL's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 43.45% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.39% is above that of the industry average.
  • Net operating cash flow has slightly increased to $13,538.00 million or 8.26% when compared to the same quarter last year. In addition, APPLE INC has also modestly surpassed the industry average cash flow growth rate of 5.40%.

At the time of publication, Jackson had no positions in stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. 


Jackson completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.


You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson. 

You can contact Eric by emailing him at Dr.eric.jackson@me.com.

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