Apple Inc. (AAPL)’s Watch Will Be Bigger Than You Think

Apple Inc. (NASDAQ:AAPL) doesn’t even have a smart watch on the market, but that’s not stopping naysayers from shooting it down.

Jefferies analyst Peter Misek — who has an uninspiring hold rating and $420 price target on the shares — talked down the prospects of the long-rumored iWatch yesterday.

By his math, with an installed global base of 250 million iPhone users and a 5% penetration rate — or just 2.5% a year given the two-year replacement cycle on iPhones — he’s projecting just 6 million of these devices shipping annually. At an average selling price of $175 apiece and a modest 30% gross margin this translates into just $0.27 a share in earnings and $1 billion in revenue.

It’s hard to argue with the price. Apple Inc. (NASDAQ:AAPL) won’t be able to sell these for much, and they won’t be subsidized by carriers the way that iPhones are domestically. Pebble established the market with its $150 smart watches, and Apple Inc. (NASDAQ:AAPL) won’t be able to go for much more of a premium if the functionality is the same.

However, it’s hard to accept that just 6 million people will be buying these a year. Apple Inc. (NASDAQ:AAPL) has too many hardcore fans. If 5 million people turned out to snap up Apple 5 smartphones the weekend it hit the market, there will be a lot more than 6 million early adopters over the course of the iWatch’s first year on the market.

We’re also assuming that Apple Inc. (NASDAQ:AAPL) isn’t going to raise the bar here. The iPhone changed the game for smartphones, and the iPad introduced the world to a form factor that it didn’t think it needed. This isn’t going to be the iPebble. If that was it, we would’ve seen it by now.

Misek is generally unimpressed by the current crop of smart watches on the market. The small screens and cumbersome buttons aren’t enough to justify the convenience of not having to take the paired smartphone out of the pocket or purse.

Wearable computing has been more hype than marketability. Google Inc (NASDAQ:GOOG) turned heads when it first showed off Google Inc (NASDAQ:GOOG) Glass, but criticism has grown now that they are being spotted in the wild as beta testers kick the tires.

However, Apple won’t get that kind of negative reaction with the inevitable iWatch. It won’t be as expensive. It won’t look as fashionably suspect.