How Much Could an Apple Inc. (AAPL) iWatch Add to Its Bottom Line? – NIKE, Inc. (NKE)

Over the last year, there have been rumors of Apple Inc. (NASDAQ:AAPL) releasing a TV that will revolutionize the television market. That rumor, along with strong iPhone 5 demand exploded Apple Inc. (NASDAQ:AAPL) through $700 per share. Nowadays, with Apple missing analyst estimates and rumors of margin contraction, shares have fallen from grace.

Apple Inc. (NASDAQ:AAPL)

However, there is a bit of light at the end of the tunnel for all investors waiting for an innovative product to “change the game” in the meantime. This “light at the end of the tunnel” could be a wristwatch, or what the media has dubbed, an “iWatch.”

What are the analysts saying?

Amit Daryanani of RBC Capital Markets was one of the early adopters of trying to estimate what an iWatch could do for Apple’s bottom line. Daryanani argued that an iWatch could add up to $9 billion to revenue and $2.00 per share to Apple Inc. (NASDAQ:AAPL)’s bottom line within its first year of existence.

On a different note, Adnaan Ahmad an analyst at Berenberg, noted that even with a launch of an iTV and an iWatch, Apple still may not see the growth that investors and other analysts are anticipating. Ahmad states that even if the iTV and iWatch capture 5% and 10% of each respective market, these devices will only achieve a respective quarterly revenue run-rate of 10% and 5% each.

Why buy an accessory product

A watch is an accessory. So, even it being an Apple Inc. (NASDAQ:AAPL) product, it should just be considered an accessory – a fancy accessory at that. Since this watch will likely be technologically advanced, the only comparison that it could be compared to would be NIKE, Inc. (NYSE:NKE)’s Nike+FuelBand.

The Nike+FuelBand is much more than just a watch. According to NIKE, Inc. (NYSE:NKE)’s website, “Nike+ FuelBand measures your everyday activity and turns it into NikeFuel. It tracks calories burned, steps taken and more. It’s also a great watch. Nike+ FuelBand tracks running, walking, dancing, basketball and dozens of everyday activities.”

The initial launch of the NIKE, Inc. (NYSE:NKE)+FuelBand saw much hype and much demand. On the day of its launch, Nike tweeted, “Today’s limited pre-order stash of the Nike+ FuelBand sold out fast. Keep your eyes on @NikeStore & @NikeFuel for inventory updates.” Some unconfirmed sources said that the device sold out within 4 minutes.

We can obviously assume that Apple Inc. (NASDAQ:AAPL) would release something more than just a watch. The most recent news of the iWatch is a patent filed by Apple, for a flexible-touch display. This could be one of the revolutionary features that analysts and investors were hoping for.

How to value the potential of an iWatch to Apple’s bottom line

Consider that the last 12-month iPhone sales were just about 135.8 million units. Assume of these units sold that about 25% of these people, would actually purchase an iWatch.

Next we have to consider how much the iWatch will retail for.

The Nike+FuelBand currently retails for about $150. If Apple Inc. (NASDAQ:AAPL) is developing its watch with a flexible-touch display, one could estimate it would be more expensive than NIKE, Inc. (NYSE:NKE)’s Nike+FuelBand. Let’s assume a low estimate of $199 and a high estimate of $299.

With a 25% adoption rate of the last 12-month iPhone buyers, presumably about 34 million people will purchase an iWatch in the first year. At the retail prices listed above, Apple will generate about $6.8 billion on the low end, and about $10.2 billion on the high end.

Over the past 4 years, Apple Inc. (NASDAQ:AAPL)’s profit margin has ranged from 19.2% to 26.7%. Apple stated in its most recent 10-Q filing, “The Company expects its gross margin percentage to be lower in 2013 than experienced in 2012. The lower gross margin expected in 2013 is largely due to anticipation of a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipated component cost and other cost increases.”

So let’s assume a 22% or 23% profit margin on the iWatch, and shares outstanding of 950 million. Therefore, the iWatch, on the low end, could add about $1.61 per share and about $2.41 per share on the high end.

What does this all mean?

On average, it will increase current analyst revenue estimates by just under 5%, at 4.65%. It will increase analyst EPS estimates by about 4.51% on average.

Analyst estimates call for a 16-17% increase in Apple Inc. (NASDAQ:AAPL)’s 2013 revenue, compared to 2012. However, with an iWatch, it could potentially be an increase of 22%. Moreover, analysts expect a 0.8% increase in 2013 EPS compared to 2012, while the potential of an iWatch, could increase EPS by 5.4%.

The article How Much Could an Apple iWatch Add to Its Bottom Line? originally appeared on and is written by Brandon Pilzner.

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