Along with periodic Above Avalon posts accessible to everyone, I write 10-12 articles a week about Apple sent exclusively to Above Avalon members via a daily email. The following article was sent to members on June 17th. Please visit the membership page for more information and to sign-up.
Wall Street Starting to Doubt Apple Watch
One by one, sell-side analysts are starting to turn cold on Apple Watch, a product released seven weeks ago. Yesterday, Pacific Crest analyst Andy Hargreaves published a note saying his confidence in Apple Watch is declining as interest appears to be higher in the iPod than Apple Watch, judging by Google Trends, and something needs to be done or else Apple will struggle meeting Watch expectations. Here's Hargreaves:
"Initial Apple Watch demand has been very strong and our most recent checks suggest Apple remains well positioned to produce enough units to meet or exceed our FQ3 unit estimate of 5.5 million and our F2015 unit estimate of 11 million. However, reviews of the device have been mixed, the fashion angle appears to be leaning a bit too much toward "calculator watch," and general consumer interest as measured by search volume is below the iPod (with an "o")...All of this suggests a dramatic increase in functionality is likely needed to grow unit sales and meet current expectations for F2016 unit volumes. Given Apple's developer community, this is clearly possible. However, our confidence is declining, which suggests risk to our F2016 unit estimate of 24 million is increasing."
I will comment on his Watch sales estimates shortly, but it's important to note what he is arguing: once early adopters buy the Watch, evidence in the form of Google Trends would suggest sales will slow. The focus isn't so much on Apple Watch sales for the current quarter or even next (those will probably be fine), but the follow-through as we move away from launch. Basically, the question being raised is will normal people buy the Watch?
Hargreaves is not the first analyst to raise Watch concerns. On Apple's last earnings quarter, Toni Sacconaghi of Sanford Bernstein took issue with Tim Cook's attitude and tone when discussing Apple Watch. Here's Sacconaghi:
"I just wanted to revisit the watch. Tim, I think you've said, when you were talking about your new products, you said we're 'very happy with the reception' and in response to a previous answer, you said, 'relative to demand, it's hard to gauge with no product in the stores.' I would say relative to other product launches, where your commentary around demand was characterized by superlative after superlative, that assessment feels very modest."
Tim responded, "I'm thrilled with it, Tony, so I don't want you to read anything I'm saying any way other than that. So I'm not sure how to say that any clearer than that." Sacconaghi recently visited with Tim Cook and Luca Maestri and once again he made note of their demeanor, saying their tone was "confident, though not ebullient."
All of this doubt should be expected as Apple chose not to disclose Apple Watch sales. That decision was likely not taken too lightly at Apple HQ. If management announced opening weekend sales, a can of worms would be opened where people would expect such disclosure at every turn and any slight deviation would be marked as a negative. Take a look at iPad to see what being aware that unit sales are declining year-over-year can do to a product's perception.
However, by not releasing sales numbers, doubt and worry are allowed to build as there is no concrete evidence to refute an analyst's analysis. Instead, some are left resorting to analyzing management's tone when talking about the Watch.
I suspect one of the driving reasons that led management to keep Apple Watch sales under wraps is that given the current environment, Apple doesn't need to release Watch sales numbers. With the iPhone selling so well and representing a large portion of operating income, I can see Apple looking at that and saying that there wouldn't be much benefit from releasing Watch sales numbers. When you are selling 50 million iPhones a quarter, announcing four million Apple Watch sales may be lost on many market observers. In addition, the less Watch disclosure, the harder it would be for competitors to respond.
The very little amount of data that we do have on Watch sales (primarily from Slice Intelligence, but also Apple revenue guidance for the current quarter) would suggest that Apple Watch sales look solid (4M so far), although the adoption rate may be a bit weaker than that of the initial iPad in 2010. Said another way, the Watch may indeed take a bit longer to catch on with people compared to how the world seemed to accept the iPad over night. Did Apple expect this and feel it was prudent to not release sales early on? It's possible. In a way, Apple would be somewhat hedging its bet just a bit.
Let's not forget, Apple has been big about disclosing sales numbers if they are strong. That's why I think this decision may be related to iPhone strength. Apple would have decided they weren't going to break out Watch sales numbers months ago. I suspect this is not a decision based on opening weekend sales strength or weakness.
Ultimately, Wall Street is all about expectations. Back in November 2014, my very first Watch sales estimate was for 20-30 million units to be sold in the first 12 months on the market. In March 2015, I fine-tuned my estimate to 28 million units in the first 12 months on the market. These numbers are important because they help frame how I look at the Watch and what would be "disappointing" results or "strong" numbers. Every analyst is different, and that is important to take into account when they issue research notes discussing the Watch. Looking back at Hargreaves' note, his 12-month Watch sales estimate looks to be pretty similar to mine across the board, so he's not overly optimistic or pessimistic.
If analysts' main concern is around Apple Watch sales in 2016, I have a feeling we may need to get used to this Apple Watch doubt. We are in the very early innings of this game, and there is no evidence yet to suggest the Watch has struck out.
In addition to the preceding article, Above Avalon members also received the following articles this past week:
- The Genius Move Behind the Phil Schiller Interview
- How to Discover Apple Watch Sales
- Apple is Playing Offense, not Defense
- New Productivity Features Hint at iPad's Future
- Fitbit Prices IPO Above Expectations
- Cablevision CEO Sees Cable Bundle Dying
- Apple's New Search APIs
- Apple Retail Store Renovations
- Apple Hiring News Editors
- Apple Correctly Killed Plans for Beats Wifi Speakers
To read these articles (accessible via email) and receive future articles containing Apple analysis, subscribe at the membership page. A weekly option is also available containing all of the week's articles in one email delivered at the end of the week. Above Avalon is supported 100 percent by its members. Thank for your continued support.