- Apple Inc. recently unveiled Apple Watch Series 2 along with the iPhone 7.
- The IDC recently reported a dramatic sales decline for the Apple Watch during Q2.
- Does Apple Watch have a future?
Apple Inc. (NSDQ:AAPL) recently unveiled the second-generation Apple Watch, dubbed Apple Watch Series 2. The new smartwatch features pretty impressive specs including swim-proof up to 50 metres, built-in GPS, improved graphics, and a faster processor. It looks much like its predecessor but with substantial hardware upgrades including a new ceramic case that AAPL says is four times tougher than stainless steel. Prices start at $369 for Series 2 while the original Series 1 will now sell for $269 after receiving a processor upgrade.
The launch coincided with the unveiling of the iPhone 7 and has predictably sent Apple shares reeling, tanking close to 5%. Curiously enough, most Apple product releases have historically been accompanied by negative stock price action. Apple stock has, however, more often than not gone on to make strong 6-month and 12-month gains as I explained here.
Apple Watch Has Been Underwhelming
The fact that Apple stock has been hammered a bit post-product launch, as per expectations, cannot detract from an even more dire fact: that Apple Watch has generally underwhelmed. Of course, Apple does not divulge Apple Watch sales so investors have to make do with channel checks and inventory estimates by Wall Street analysts and other organizations.
Renowned research firm IDC is the latest firm to come up with an Apple Watch sales estimate--and it's not pretty. According to the firm, Apple sold a mere 1.6 million units of its smartwatch during the second quarter, good for a massive 55% year-over-year decline. That's torrid for a product that has been in the market for less than 18 months. During its debut, Tim Cook famously touted the Apple Watch as ''the next chapter in Apple's story.'' Wall Street and the investing community expected it to be the next big mobile battleground and Apple's next big thing. Those dismal sales for the Apple Watch are unflattering, even if we presume people have been holding off new purchases as they awaited the arrival of the upgraded products. After all, Apple had dropped the price of the product by $50 to $299, and Apple still boasts one of the most powerful brands in the industry.
Apple Watch was ranked the best-selling smartwatch in 2015 by a cross-section of research firms including the IDC and Juniper Research. But it's almost certainly now relinquished that position, and may not even be a top-3 best-seller after the second quarter plunge. The IDC report says Samsung Electronics (OTC:SSNLF), LG Electronics, and Lenovo saw their smartwatch market shares grow during the second quarter, though from a smaller base than Apple Watch.
Wearables market doing poorly
But Apple is not alone. Current indications are that apart from a select few, many companies that have tried their hand at the smartwatch product have generally struggled with the IDC saying industry-wide sales fell 32% during the second quarter. One notable exception is Fitbit (NYSE:FIT), which has managed to continue growing sales in both good and poor economic cycles.
Fitbit brands its wearables as fitness bands/watches rather than full-featured smartwatches. During the last quarter, the company posted 46% sales growth after selling 5.7M devices. Although that's a far cry from a year ago when the company was growing in triple-digits, it's still among the fastest growing companies in the industry. Fitbit's success comes not from being the best smartphone manufacturer per se, but from making basic smartwatches that perform basic functions well.
Further, Fitbit's minimalist approach to features allows the company to price its products very competitively. Fitbit's high-end Blaze and Alta, which made up 54% of the company's sales during the last quarter, sell for only $200, significantly lower than the entry price for Apple Watch Series 1. The company's EBITDA margin of 18% is impressive for a low-end hardware maker.
And there's the big problem for Apple Watch. Companies like Apple could be going for overkill with their smartwatch products, but the market does not seem to be ready for that. Too many features crammed into a smartwatch make it look like a mini-computer on your wrist, and many people have no idea what to do with all those features.
Moreover, a deluge of features act as a drain on battery life. The Apple Watch Series 2 has a battery life of 18 hours, zero improvement compared to Series 1. Samsung is shooting for a four-day battery life for the Samsung Gear S3 with the always-on display turned off and two days with the feature turned on. No color touchscreen device currently manages battery life longer than 24 hours. If the company follows the Gear S2 roadmap and prices the Gear S3 at $299, those two could prove to be strong selling points and could allow Samsung to steal significant market share from Apple in this segment.
Apple Watch could be performing below expectations not because Apple is not innovative enough but rather because the company is well ahead of the curve. A similar thing happened with the smartphone revolution when the iPhone struggled in its early years before finally taking off after the ready availability of mobile apps dramatically increased its usefulness. Right now fitness is the easiest selling point for smartwatches. But until manufacturers like Apple increase the value proposition of their wearables, it might be another 2 to 3 years before the smartwatch revolution truly gets underway.