Marketing Implications from BuzzFeed's Apple Watch Demo Video

It is no secret that tech gadget review trends have changed over the years. What was once ruled by articles filled with jargon and specs are now led by videos that contain first impressions and interesting commentary. BuzzFeed sent two reporters to the Apple Watch event. Their demo video, which was light on detail, but heavy on emotion, was published yesterday. Unsurprisingly, many people are not happy with the video.

The official iTunes Twitter account retweeted the video to its 7 million followers. BuzzFeed did the same to its 2 million followers. The video has around 750,000 views on YouTube, so no where near viral material, but starting to reach some mainstream circles.

The BuzzFeed video talked about things that most people will think about when determining if Apple Watch is something worth buying. The two reporters discussed potential use cases in their daily lives where the watch would come in handy. There was no mention of the Digital Crown (which Apple also didn't discuss on Monday), screen specs, memory, pricing, or even the fact that the watch requires an iPhone. Instead, the video showed two Apple Watch users saying things like:

• "Already this feels amazing."
• "[Apple Watch] changes the game for messaging I think...and it's right on my wrist. That's so easy. I love that."  
• "It feels very classy. It's almost kind of like vintage like old Hollywood feeling. Kind of feel like a movie start mixed with an astronaut." 
• "I like that when you turn [your wrist], the face comes up."
• "I think it's going to change the way we talk to each other."

After watching the BuzzFeed demo, the viewer would understand that Apple Watch is a product that is clearly different than just an iPhone on your wrist, with many different features. Interestingly, that is the exact message Apple was going after. Accordingly, some people weren't too happy with the BuzzFeed demo and started to question its authenticity. 

AdAge asked Apple about the BuzzFeed video and whether it was a paid advertisement (it wasn't), and then goes into a discussion on how Apple never did something like this under Steve Jobs. Yes, they actually said that. Joshua Topolsky, a media editor at Bloomberg, was not pleased with the video, publicly calling the whole ordeal "embarrassing". The YouTube comment section for the BuzzFeed video was filled with negative reaction asking if the video was some kind of marketing job from Apple. People are still uncomfortable with where tech gadget reviews are headed. 

The goal in product reviews is to recognize that viewers have an endless amount of information and resources at their disposal and are merely looking for things that can't be learned from visiting websites, namely emotion and real-world experiences. Giving viewers that in a well-edited video, filled with personality, like what BuzzFeed did, will be popular going forward. For additional evidence, look at all of the people Meerkating in the Apple demo event. The primary point in doing that was to connect with viewers and give an inside look at the room and some initial early impressions of the products. I doubt a livestream where someone is just running off spec after spec would be as interesting to watch as someone casually chatting away about how the Apple Watch may fit in their life, and just happening to let 100 people look on over Meerkat. 

The Verge's Apple Watch demo video (200,000 views on YouTube) was obviously different than BuzzFeed's video because The Verge has a different reader base, with specific needs and values. 

The contrast between the BuzzFeed and The Verge demo videos are noteworthy, demonstrating the much bigger trend in technology: personalization. While there is still demand for videos that go into a gadget's specs, the momentum is clearly found with videos that simply discuss the emotion behind the product and if it is something worth people's time to learn more about. Gadgets are becoming extensions of ourselves and that is only intensified with wearables. While some may be interested in the assumptions included in stated battery life claims, many more will be mesmerized by an animated Mickey Mouse watch face.

Incidentally, Apple has been placing emotion ahead of tech specs in its marketing campaigns for a long time. We saw this once again at Monday's keynote where the takeaway message was to drum up interest in the Watch and not focus on specifications or even how the Digital Crown works. This makes the Apple online store that much more important as a source of information, in addition to brick-and-mortar retail establishments. Taking a look at Apple's recent retail hires, it would seem that Apple is betting its retail arm will become more crucial to the overall business as time goes on. Apple is also introducing a new type of watch preview system at its retail stores where the goal is to educate customers on Apple Watch. 

Tech sites will have a very difficult time adopting a model where emotion is the primary focus of their gadget reviews. If The Verge tried to do an Apple Watch demo like BuzzFeed, their users would rise up in revolt and the reviewer would probably be dismissed (or told to correct the video). 

Tech reviewers like Marques Brownlee, who is already somewhat of a YouTube sensation with 2.3 million subscribers, are resonating with viewers because they represent the hybrid between The Verge and BuzzFeed (while also being purely video based). Brownlee's high-quality videos are concise, filled with relevant information and personality. I suspect a good portion of Brownlee's viewers are also tech site readers. Apple's "Spring forward" keynote was Brownlee's first Apple event. His MacBook video demo from the Apple event has 650,000 views on YouTube in one day.

As technology becomes more personal, emotion will need to play a bigger role in explaining how a particular device can fit into someone's life. While some felt uncomfortable with the BuzzFeed video and its lack of detail, there are many others that genuinely got something out of it and will now take time to research the product. The gadget review continues to evolve and personalized gadgets like Apple Watch are only accelerating the process.

I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe. 

The New Apple: Embracing Personalized Technology with a Luxury Twist

While it may seem like we have everything figured out about mobile with the iPhone form factor now cemented in our daily lives, in reality, we are in the early stages of the current mobile renaissance. Consumers are still trying to figure out what sizes of glass should be carried in our pockets or worn on our bodies. Despite all of these changes, there is one theme that has remained unwavering: technology is becoming more personalized. With Apple Watch, Apple is placing a big bet that a device for the wrist is the next progression of personalized technology, which inherently adds an element of luxury and fashion to the mix. Yesterday's Apple Watch keynote wasn't perfect, but management took the opportunity to tweak its marketing message a bit with the goal of positioning the Apple Watch as the newest, most personal device in the iOS product portfolio. The Apple Watch has the potential to be positioned as the primary interface for mobile computing.

Unchartered Territory

If there was one moment of the Apple's "Spring forward" keynote that should stand out it occurred at the 52-minute mark. Up to that point, the presentation was classic Apple. After a little bit of Apple TV news, Jeff Williams introduced a new health research platform that came across as something only Apple would be able to do, and Phil Schiller was up on stage, gleefully explaining why the new MacBook was the best Mac ever imagined. For the first 52 minutes of the event, Apple was at its best, and it showed. When the discussion turned to Apple Watch, Tim Cook and Kevin Lynch spent the next 42 minutes talking about all of the things Apple Watch can do, but the presentation lacked the same level of cohesiveness that was found in the beginning slides. Cook awkwardly worked through the Christy Turlington Burns storyline, which gave off a bad late-night TV talk show vibe. One could sense that the Apple Watch and all of the inherent fashion and luxury surrounding the product is new territory for Apple, and it may very well be more of a "learn as you go" mantra when it comes time to explain the device to the world. 

Less Details, More Insight

A prime example of Apple still playing around with how Apple Watch should be marketed was how Apple chose to bypass any mention of the Digital Crown.  Back in September, Tim Cook literally introduced the Apple Watch to the world as a device dependent on a breakthough user interface based around the Digital Crown. The Apple Watch borrowed much heritage from a classic watch crown but altered its functionality to essentially be the "pinch and zoom" of the Apple Watch. Jony Ive was quoted in the press about all of the painstaking effort put into coming up with the Digital Crown. Yesterday, the only reference to the Digital Crown was said in passing by Kevin Lynch who mentioned "crown" a few random times during his demo. Such a change in marketing didn't quite stop there as Apple seemingly avoided discussing much of the mechanism dealing with Apple Watch buttons, menus, and swipes. There was also little to no discussion around the device specifications, similar to what Phil Schiller had just finished doing with the MacBook. The Watch is different, and Apple treated it accordingly.

Not coincidentally, reviewers' initial thoughts about the device after 15 minutes of demo time seem to center around the watch feeling a bit complicated to use. There may be a learning curve involved with Apple Watch, and management decided to spend less time talking about those details and more time talking up apps and things that would increase someone's interest in the device. The strategy would seemingly involve Apple Retail to help get people comfortable with the new user interface. Apple did announce there will be an opportunity to preview Apple Watch at Apple Retail stores, which will likely involve a quick overview of the device. We have experienced very few breakthrough user interfaces since the mouse, so maybe our sense of perspective and expectations for ease of use is a bit skewed by the sheer intuitiveness of multi-touch?   

Bringing iOS to the Wrist

Some criticism that was thrown towards Apple after the first Apple Watch event in September was that there wasn't a clear reason given for why someone should buy an Apple Watch. Even after yesterday's keynote, there likely were many disappointed pundits awaiting Apple's clear bullet by bullet list for why the Apple Watch is worthy of someone's wrist. In reality, however, Apple explained in not so clear language why Apple Watch makes sense: it brings technology much closer to the user. Similar to the way the iPhone and iPad seemed magical next to laptops and desktops, having a device that is on the wrist, a location with superior line of sight and proximity to the face, may bring new ways of using technology. 

Apple could have explained the device a bit better in context of the full product lineup, as shown below. If one was to go back to Apple's previous keynotes, Tim Cook eloquently explained the following slide that was in yesterday's presentation.

Exhibit 1: Apple's Current Primary Product Lineup

Instead of relying on antiquated consumer/professional product matrixes, Apple's product strategy can be described by a personalization analysis, included in Exhibit 2. It is clear where the Watch fits into the mix. 

Exhibit 2: Apple Personalization Product Analysis

In terms of selling the Apple Watch to consumers, Apple, as expected, relied on a soft sell approach by merely listing various apps that I would suspect were heavily favored and used by Apple employees that got to test the device over the past few months.  While some may have poked fun at the thought of using Instagram on a watch, one would hope Apple obtained valuable input from employees indicating photos on a wrist had some intriguing value to them.

The overarching theme of Kevin Lynch's Apple Watch demo was about iPhone substitution. While many of the Watch app demos fell a bit flat due to the personalized nature of both the app and the device, a close listen to Kevin Lynch's dialogue would be very revealing. If audience members closed their eyes, it would have sounded like Lynch was talking about a new iPhone. Not only did he discuss things that were known to be watch-focus activities, like notifications and messaging, but nearly every app discussed was a popular app on iPhone. Lynch made his ultimate rationale for owning an Apple Watch clear when he said he would want to leave the phone by the door and just use the watch around the house. I suspect there are very few people who really think of Apple Watch as this versatile.

Personalization Allows Luxury 

As personalization permeates through mobile technology, one of the more interesting consequences is how luxury is inherently intertwined in the discussion. Since Apple Watch is a device meant to be worn, Apple was correct in assuming people would want the device to represent their personalities and styles. Apple is selling Apple Watch to everyone from high school students to senior executives with a keen fashion sense (although some still seem opposed to Apple's fashion sense). As the level of exclusivity increases, an item is able to display more characteristics of luxury, as shown in Exhibit 3.  Moving along the independent axis, supply begins to decline, an often necessary ingredient in luxury markets. Compare a flagship iPhone model that ships hundreds of millions of units per year to a personalized Apple Watch Edition with limited supply. The iPhone will simply not contain the same potential as the Apple Watch to be regarded as a luxury item. Critics would point out that there is plenty of emotion that enters the equation when analyzing and referring to something as luxury. Nevertheless, the general idea behind Exhibit 3 still stands. 

Exhibit 3: Exclusivity vs. Luxury

The interesting aspect of Apple embracing luxury is that Apple inherently has the ability to add even more personalization in the form of software, but it may be best to assume the luxury markets treat that with some level of doubt. While the first version of Apple Watch may not push the boundaries of what is possible with customized technology, future reiterations, including various other devices, would certainly beg the question of what the limit is to Apple's luxury motives. Exhibit 4 shows the various Watch collections graphed according to price. It is easy to see that at least on paper, Apple is relying on scarcity ("exclusivity" sounds better for marketing) in order to drive prices higher. 

Exhibit 4: Apple Watch Prices by Collection

Threading the Luxury Needle

One of Apple's primary goals yesterday was to transition to a premium mass-market luxury brand. Even though Apple has mastered the art of selling mass-market goods at premium prices, catering to a luxury clientele comes with new risks, including alienating core users who may be turned off by management's focus on the high-end at the detriment of the "low-end." Apple handled the transition well by offering clear distinctions between the three tiers (aluminum for Sport, stainless-steel for Watch, and 18K gold for Edition). Tim Cook's presentation of the Edition pricing (no stated pricing on a slide and no video depicting the gold) suggested there will be a very clear difference, or segmentation, between how the Edition is sold compared to the other two tiers. There will likely be very few instances of $349 Apple Watch Sports being sold next to $17,000 Apple Watch Editions. 

Pricing Looks Right; Sales Potential Remains Elevated

Apple is selling the Sport and Watch collections for a reasonably fair price with premium mass-market in mind. The Edition pricing reflects not only the 18k gold but also artificial scarcity with limited production. The initial target market for Apple Watch is approximately 400 million iPhone users. If one were to simply look at iPhone 6 and 6 Plus users as a closer barometer of likely Apple Watch purchasers, the market is now greater than 100 million users. It is important to remember that many consumers do not buy the first version of a product for a multitude of reasons. Therefore, most people will not buy Apple Watch in 2015, or even 2016. With that in mind, I still feel confident in my estimate of 17 million units sold in 2015 with another 35 million units sold in 2016. If looking at sales in terms of months of market, for the first 12 months on the market, Apple will likely sell around 25 million Apple Watches. Beyond 24 months, sales may be a bit more difficult to forecast as it is unclear what the Watch upgrade cycle looks like. Apple has indicated the battery can be swapped out, and some of Jony's recent comments would suggest there may be a scenario where the watch face doesn't change much from year to year. 

Expanding the Personal Experience

The primary takeaway from Apple's keynote yesterday was that the iOS product family is expanding as a watch takes up the spot of the most personal device Apple has ever made. The watch holds the potential of becoming the primary input for mobile computing, serving as the assistant that people thought Siri on iPhone was going to become. Meanwhile, the iPhone's relevancy doesn't necessary decline in an Apple Watch-focused world. Instead, the iPhone continues to gain power and capabilities from both the iPad and Mac. The Apple Watch has the potential to overpower iPad in terms of popularity and usage. The device's upgradability is the primary unknown as to whether unit sales will indeed surpass the iPad. However, odds look to be in the watch's favor.  

Apple's main selling strategy is to get consumers into an Apple retail store and in front of a watch. It is somewhat similar to the way the iPad took off once people played with one. The obvious difference is that it is much harder to "play" with an Apple Watch in an Apple retail store, and it will likely require an appointment. 

Apple is coming up with various devices that each serve a different function, letting the user interact with technology in a few unique ways. Going forward, I suspect the iPhone and Apple Watch will garner the most attention while the Mac is positioned as a product for higher power computing needs. By entering into wearables, Apple is getting its first taste of personalized technology built around accessories (bands) and luxury. The key question going forward is what will Apple learn from this process (both in terms of manufacturing and sales) that can be applied to future Apple Watch editions as well as other wearables? For Apple, the Watch is one way to play a much more significant role in an iPhone user's life. 

Receive my exclusive analysis and perspective about Apple in a daily email containing 2-3 stories (10-12 stories a week). For more information and to sign up, visit the membership page. 

Apple Won't Look the Same after Monday's Apple Watch Keynote

The Apple Watch represents the biggest product bet Apple has placed since the iPhone in 2007. Apple will never be the same kind of company once Apple Watch pricing is revealed on Monday. Management's primary focus during Monday's "Spring forward" Apple Watch event will be showing how a premium mass-market technology brand can embrace luxury without alienating a portion of its customer base. On one hand, Apple Watch is a device that seemingly no one asked for, but on the other hand, it is a device that holds enough potential to reshape the mobile landscape by altering the way consumers use iPhones. 

Goals for Monday's Keynote

Reposition Apple as a premium mass-market luxury brand. Apple is currently a premium mass-market brand, selling gadgets to addressable markets that number in the hundreds of millions. With Apple Watch, Apple is entering new territory, embracing luxury and the required scarcity of supply that comes with a luxury label. Such scarcity at the high-end is obtained by controlling the demand side of the equation through high prices. Apple Watch Edition collection prices will likely shock those observers who aren't aware of Apple's motivation to become more like a luxury brand. At the same time, Apple is holding on to its premium mass-market heritage by selling Apple Watch Sport at a $349 starting price.

As confirmed in The New Yorker Jony Ive profile, Apple's decision to embrace luxury is deliberate and likely taken in recognition that to be successful in the wearable space, a new strategy would be required. Consumers need to feel connected to a wearable accessory as the device becomes an extension of their personality. Apple's new premium mass-market luxury brand will also help drive subsequent demand for new product categories that position fashion and emotion as key buying determinants, with materials utilized as differentiation between luxury items and premium mass-market goods. 

Apple will need to frame this branding message a bit before revealing Apple Watch pricing in order to clearly demonstrate that Apple Watch is targeting everyone from high school students to senior executives with three distinct watch collections, and not just luxury items with low-end counterparts. 

Explain Apple Watch. Apple will likely demonstrate through app demos and talking points why the Apple Watch exists: to shift some utility from the iPhone to the wrist. Management can also discuss stand-alone features such as health tracking. There is some risk involved here. Talk up the device functionally too much, and the iPhone upgrade cycle may be put at risk as consumers hold on to iPhones for longer and instead buy new Apple Watches. Talk down the device, and consumers will choose to bypass it altogether. The ability to market Apple Watch in context of the entire Apple ecosystem is a powerful variable that literally no other company can copy, and I would expect Apple to reiterate that. In many ways, some of Apple Watch's features may need to be demonstrated not so much to sell Apple Watch, but to sell the Apple Watch plus iPhone combination. 

Soft sell the Apple Watch.  Apple has consistently used timekeeping, communication, and health & fitness as Apple Watch marketing tent-poles. If one is expecting Apple to drastically change from this strategy when it positions Apple Watch to the public on Monday, there may be some disappointment. Apple spent only 12 minutes demoing Apple Watch last September. On Monday, there will undoubtedly be much more time to demo various apps, including possible in-house apps or features that Apple kept under wraps. 

Contrary to consensus opinion, Apple will rely on soft sell messaging where the overall message is that Apple Watch is a personalized device capable of doing various tasks. Relying on a strategy similar to the way iPhone and iPad were sold may fall flat for a luxury item. Instead, Apple needs to rely on the device itself, including its look and design, to spark interest. The hardest part will be getting consumers interested in the device. Once that relationship is established, Apple can rely on its retail infrastructure to turn interest into a sale, and then that's where Apple's marketing message comes into play. 

Questions

What will be the price range for the Watch collection? Edition collection pricing will be established with scarcity in mind. Watch collection pricing will determine how big of a seller the mid-tier option will be when compared to the Sport collection. If Watch collection is priced near $500, it may be tough to forecast which will sell more: Watch or Sport. However, if Watch collection is priced above $1000, the Sport collection will be the primary beneficiary from a unit sales perspective. 

Will there be new watch bands? While most of the attention has been given to the various watch faces, the bands may be the bigger story of the day. Details ranging from price to availability will help determine how versatile Apple Watch can be and how much fashion enters the buying decision. Is there a possibility Apple will unveil new ultra-luxury bands priced well over $10,000? 

What will the Apple Watch rollout look like? Reading in between the lines, it would seem that the Apple Watch rollout will be more measured than previous product launches that we are used to. The going assumption will be that the U.S. will get the device at launch. Tim Cook mentioned Germany will see the device in April, which implies that there will at least be a handful of countries receiving the device within the launch month.

The Apple Watch is a big deal for Apple. Not only does the device represent a new product category, but success will be dependent on behavioral change related to iPhone usage. Wrist real estate is in precious demand, and I continue to see an upcoming battle for ultimate wrist supremacy. Apple's strategy will be to mask additional utility with fashion and design. Luxury presents a number of opportunities, and challenges, for Apple. As recent executive hires have shown, Apple is ready for the challenge. Apple will never look the same after Monday. 

Receive my exclusive analysis and perspective about Apple throughout the week (2-3 stories a day, 10-12 stories a week). For more information and to sign up, visit the membership page. 

Tackling AAPL's $1 Trillion Question

Apple currently has a $750 billion market capitalization ($612 billion enterprise value). There are two factors that will determine whether Apple will reach a $1 trillion market cap: future financial performance and investor's willingness to pay for that performance.

Future Financial Performance

Apple's cash flow and earnings provide the best view on Apple's ability to sell products. Fortunately for investors, both data points are relatively straightforward with little in the way of required adjustments. Apple has $12 billion of deferred revenue on its balance sheet related to the way software is accounted for, but the overall impact to the bottom line won't change any conclusions found in this post. Carl Icahn raised issues concerning non-cash tax accruals, which have roughly a 10% impact on Apple EPS, but it remains to be seen if such an adjustment is completely warranted. Similar to the deferred revenue, I don't see the adjustment being a factor in the $1 trillion debate.  

Apple reported $44.5 billion of net income ($7.42 EPS ) in CY2014. The degree to which Wall Street forecasts future earnings depends on the industry being analyzed. For financial companies, certain financial metrics are typically forecasted three to four years out, while for a company like Apple, estimating beyond two years is a stretch.  Investors understand the volatility inherent in consumer technology companies and estimates, especially looking out beyond two years. For CY2015, I am expecting Apple to report $55.8 billion of net income ($9.95 EPS), implying 25% net income growth and 34% EPS growth due to the impact from share buyback. Potential earnings from unannounced Apple products are typically not included in forward estimates. Even though Apple will ship new product categories in the future, most investors are not willing to give credit for that potential EPS boost until more specific information is known.

Investor's Willingness to Pay For Performance

The much harder part in forecasting Apple's future value is related to gauging investor sentiment about Apple's future. Apple's price-to-earnings (P/E) ratio is the primary metric used to value Apple, with price-to-cash flow (P/CF) ratio serving as a secondary measure. Both ratios serve as a representation of how much an investor is willing to pay for a dollar of earnings. As an example, a P/E of 10x would indicate that investors are willing to pay ten times the amount of earnings in order to own a piece of the company and that future earnings stream. The P/E multiple mostly reflects growth expectations. If a company is expected to report strong earnings growth, a higher P/E multiple may be warranted. A P/E of 75x would indicate investors are willing to pay much more for a dollar of earnings because those earnings are expected to experience above average growth. Accordingly, companies with more mature growth have historically had difficulty achieving a P/E above the market average of around 20x. 

With AAPL trading around $130/share, Apple has a 17.5x trailing twelve month P/E ratio, which is a bit lower than the overall market. I'm not a fan of trailing P/E ratios because the future is more important than the past. In addition, the current stock price already reflects future growth, so trailing P/E ratios are a lagging indicator (i.e. they don't provide much value). With the stock trading at $130/share, Apple has a 13.1x forward P/E ratio, which is a discount to the average 16x P/E for large cap tech stocks. 

Requirements for $1 Trillion

Apple could reach $1 trillion ($171.50/share given current shares outstanding) in two ways:

A) Higher P/E multiple. Apple shares would increase in price if investors are willing to value the company using a higher P/E multiple. Currently Apple has a 12.9x forward multiple. How much higher would the multiple need to increase for Apple to be valued at $1 trillion assuming earnings remain unchanged? Investors would need to pay a 17.2x forward P/E multiple, which is 33% higher than the current 12.9x multiple. Why would an investor be willing to use a 33% higher P/E multiple to value Apple's expected future earnings stream? Two of the more likely reasons include an overall stronger equity market where the overall tide rises as investors rush into equities, and increased confidence in Apple's products and outlook. 

B) Stronger earnings growth. If we assume the forward P/E multiple remains unchanged at 12.9x, then Apple would need to grow earnings by another 32% to reach $1 trillion. Assuming Apple grows earnings by approximately 15% annually over the next 2-3 years, Apple would be valued at $1 trillion sometime in 2017. I have doubts it will ultimately play out this way though as I have difficulty seeing the P/E multiple remaining unchanged for the next three years. Investors will likely change their opinion on Apple at some point over the next three years, either becoming more positive or negative. 

Easiest Path to $1 Trillion

Apple can reach $1 trillion if investors become 33% more optimistic (using P/E multiple as a proxy) about Apple's future or if Apple is able to grow earnings by 32%. I think Apple's best chance of reaching $1 trillion will be a mixture of the two: higher-than-expected earnings growth and a higher P/E multiple as investors show renewed confidence in Apple as an ecosystem with annuity-like features (a stream of device and services revenue). 

With shares trading at $128, investors are relying on certain expectations for Apple, including iPhone and Apple Watch sales, to value the company. Since the iPhone accounts for over 70% of Apple's operating income, any significant change in sales expectations going forward will play a large role in the way investors value Apple. Last week, I detailed an achievable strategy for Apple to grow annual iPhone unit sales by 50% within three years. Is this type of growth reflected in the stock price at current valuations? The question will depend on how many investors believe the strategy is achievable. I suspect there is a bit of skepticism surrounding the thesis. 

As for Apple Watch, I published Apple Watch sales estimates of 20-30 million units for the first 12 months on the market, rising to 40-60 million units in the second year on the market. Consensus currently stands around those numbers, with 15-20 million Apple Watch units expected to sell from April to December. In theory, Apple's current $128/share price and analyst estimates already reflect these Apple Watch projections. Therefore, actual watch sales would need to come in stronger than these estimates for positive EPS revisions. In a scenario where EPS estimates are rising due to stronger iPhone or Apple Watch sales, investors may also be willing to pay more for those higher earnings, resulting in a rising P/E multiple.    

Given the current share price, Apple is 33% away from a $1 trillion market cap. While that may seem close, it represents nearly $250 billion of additional market capitalization, hardly an easy feat. Apple's best shot of reaching the arbitrary value milestone is reporting stronger than expected iPhone sales over the next 2-3 years and having a successful Apple Watch launch. Since it is impossible to know why every investor buys or sells AAPL shares, no one knows if Apple will reach a $1 trillion market cap. As long as the economy and equity market don't experience any huge shocks or surprises, Apple's existing product categories have enough potential to propel the stock to $1 trillion train. 

How about $2 trillion? That is a much more complicated story that deserves its own post. 

Wildcard: Apple's stock buyback program represents a very significant unknown in this discussion. Apple has the potential of buying back close to 20% of itself within three years. How will that impact the odds of AAPL reaching $1 trillion? In order to gain a bit of perspective in terms of size, Apple's buyback over the next two years has the potential of boosting EPS by 10-15%. Most analysts should have this type of buyback already included in their estimates and therefore already priced in the stock. The impact that the actual act of buying back shares has on AAPL is another story. There could be a beneficial impact on AAPL shares if management decided to accelerate share buyback and current shareholders show little motive to sell shares. In such a scenario, there would be upside pressure on the stock as the market price rises to find the point where supply and demand is in equilibrium. Conversely, if management slows buyback, any support that resulted from Apple being an active buyer in the market has been removed which may result in stock price weakness. I suspect the stock buyback and Apple's $178 billion of cash are something to keep a very close eye on going forward. 

This report was produced by Neil Cybart on March 3, 2015 and is not meant to be used as investment advice. 

Receive my exclusive analysis and perspective about Apple in a daily email containing 2-3 stories (10-12 stories a week). For more information and to sign up, visit the membership page.

Members have access to the Above Avalon stock buyback primer which can be used to become familiar with Apple's share buyback.

Samsung's Smartphone Dilemma

Samsung unveiled the Galaxy S6 and S6 Edge yesterday at Mobile World Congress. Following a 45-minute keynote that lacked much purpose besides highlighting how mistakes made with the Galaxy S5 have now been corrected, I'm left wondering who is Samsung's primary customer: mobile carriers or phone manufacturers? Is Samsung losing all sense of reality by ignoring consumers and instead shipping smartphones in order to drum up marketing for its stronger smartphone components business? I'm no longer confident I know why Samsung is selling smartphones.

Following last year's Mobile World Congress, it was obvious that Samsung was undergoing its second Crisis of Design. As expected, the Galaxy S5's reliance on plastic and gimmicky software contributed to Samsung losing all momentum as a smartphone manufacturer. Increased competition from both the high-end and low-end caught Samsung sleeping. Yesterday, Samsung pressed the reset button on its smartphone strategy as its latest flagship phone was positioned as a fix to last year's mistakes. Whatever option Samsung went with last year, the opposite choice was taken this year. Citing "design of the future," Samsung dropped all of the plastic, opting for metal and glass. Meanwhile, 40% of the phone's features were cut as Samsung used shaky marketing spin to position the reduction as evidence of a new strategy focused on "design with a purpose." Samsung took a few pages from the Apple playbook and removed features such as a removable battery, expansion memory, and water proofing, all of which were reasons that hardcore Samsung fans had stuck with the brand in recent years. 

The problem facing Samsung is that nearly every one of the changes made with this current crop of phones was the right move. Better hardware and fewer features have been the trend in the premium phone segment for years and the current winners have been busy building their platforms on the trust such a strategy has formed with consumers. However, Samsung's loyal customer base had remained engaged because Samsung was trying to be different, offering consumers choice and options, while design was considered an after-thought. These consumers place more value in removable batteries and the ability to swap out memory, not the look of the device. By trying to be like another premium smartphone manufacturer, Samsung may have shot itself in the other foot.  

Samsung didn't change its entire smartphone strategy. The company reiterated their goal of doing things first so that others will follow, which supposedly leads to more innovation. However, a few minutes later, Samsung announced a mobile payments platform called Samsung Pay using nearly the same presentation and talking points that Apple used five months ago when announcing Apple Pay. Interestingly, the presenter skimmed through this part of the presentation, with very few details as to Samsung Pay's implementation and the fine print. Samsung is apparently licensing the fingerprint reader technology from a third-party, which raises some questions as to the background and long-term sustainability of the feature. I thought this Samsung Pay example summed up the conflict found throughout Samsung's entire presentation.

Samsung was more focused on mentioning key words such as design, hardware, camera, and mobile payments, instead of discussing why certain things were being done or removed from the phone. This lack of clarity has been Samsung's problem for years as the company has mostly relied on offering consumers choices that other smartphone makers decided not to pursue. The problem is Apple is now selling larger screen iPhones, and Xiaomi and other local Chinese smartphone vendors are selling decent hardware at lower prices. Samsung's differentiation has disappeared. Samsung may not be at the point of utter desperation, but they certainly came off as remaining quite nervous. Samsung says they want to be first in mobile, but they show great discomfort in leading.

If Samsung is relying on its premium smartphones to market screens, processors, and other components to other smartphone vendors, instead of giving the consumer a good experience, I highly doubt the company will be able to regain the Galaxy sales momentum lost in 2014. Smartphone competition continues to intensify and companies without a mission statement built around the consumer will find dimming prospects. Samsung's refocused attention on its smartphone components business is becoming a major liability and dilemma for the company's ambitions as a smartphone manufacturer.  

I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe.