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Should Apple (AAPL) Investors Worry About Watch Sales?

Zacks Equity Research
Updated

Apple Inc. AAPL CEO Tim Cook recently “assured” investors that sales of Apple Watch were “off the charts” in the first week of the holiday season and that it is likely to become one of the most gifted items this season. He in fact said that “we’re on track for the best quarter ever for Apple Watch.”

The statement should have pacified investors who fear that Apple faces an uncertain future as demand for its flagship product iPhone is decelerating.  Apple Watch could, to an extent, cushion the top line. However, it’s not the case.

Analysts lament that Cook’s “reassurance” once again is ineffective in the absence of actual sales data. They argue that it’s high time Apple substantiates the so called success of the Watch with sales data. Per Apple, the watch’s “best quarter ever” is based on sell through metric, which implies watches sold as a percentage of what was sent to the retailers.

APPLE INC Price

APPLE INC Price | APPLE INC Quote

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Analysts also believe that Apple’s aversion to make watch sales data public is emerging as a big concern now especially after IDC’s recent report on the wearables market.

IDC reported that sales of Apple watch tanked 71% year over year to 1.1 million. The report also added that though Apple Watch sales plunged, there has been an overall growth of 3.1% in shipment of wearables. This was driven by consumers’ preference for simpler wearables, which have seen double-digit growth through the third quarter. Also, Apple’s decision to launch Apple watch Series 2 toward the end of the quarter resulted in lower sales. As growth of smart watch category remains challenged, Apple’s Watch faces tough times ahead, added IDC.

Analysts also believe that though Apple slashed the price of its Series 2 watch, it still remains expensive compared to simpler wearables from Fitbit. Reportedly, the "unintuitive user interface" of Apple Watch is also seen as the reason for its lack of demand. 

Apple’s fortunes have been tied to its most important offering, the iPhone, which alone contributed about 60% of Apple’s total revenue in the fourth quarter of fiscal 2016. However, since the last two quarters, the demand for this device has been soft owing to global macroeconomic weakness, especially due to currency volatility and declining commodity prices in some key regions across the globe (about 60% of Apple revenues come from International markets).

Apple is under great pressure to introduce new products. It recently unveiled a refreshed line of Macs. Apple Pay, Apple Watch, Apple Music are some of the new ventures undertaken by the company. Also, revenues from App Store have been growing. Then there is Apple’s autonomous car project. It is also interested in developing technologies such as AI and AR/VR, which are fast emerging as lucrative business opportunities.

Whether these initiatives will help Apple to reduce its dependence on iPhone remains a wait and see story.

At present, Apple has a Zacks Rank #3 (Hold). Year to date, Apple shares have underperformed the broader market. Shares are up 5.48% compared with 7.08% growth in Zacks Computer Mini Industry.

Better-ranked stocks in the wider technology space include TiVo Corporation TIVO, Facebook Inc. FB and Groupon, Inc. GRPN. While TiVo sports a Zacks Rank #1 (Strong Buy), Facebook and Groupon are Zacks Rank #2 (Buy) stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, TiVo, Facebook and Groupon have yielded positive average earnings surprises of 97.76%, 21.11% and 31.07%, respectively.

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Zacks Investment Research