Apple Watch 2 Is Unlikely To Move The Needle For Apple’s Fledgling Wearable Business

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Apple (NASDAQ:AAPL) introduced a new version of the Apple Watch, called Series 2, earlier this week. The technology titan is counting on the new device to shore up sales of its underperforming wearable product line, which IDC estimates saw shipments decline by 56.7% year-over-year to 1.6 million units during Q2. This translates into an attach rate of under 4% with the iPhone for the quarter, implying that the device is adopted predominantly by power users and Apple loyalists. However, we think it is unlikely that the Series 2 will dramatically change the fortunes of the fledgling product line, which we project to see a sales decline this year.

We have a $120 price estimate for Apple, which is about 10% ahead of the current market price. We estimate that Apple Watch accounts for under 2.5% of the company’s stock price.

See Our Complete Analysis For Apple Here

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Incremental Improvements, But Biggest Issues Aren’t Addressed

While the Series 2 sports two key improvements over the original watch, namely built-in GPS and water proofing, that broadens its appeal to runners and swimmers, it remains unchanged in most other respects. This could be an issue for Apple, as the key shortcomings of the Watch – namely its complicated user interface, lack of must-have apps and middling battery life remain largely unaddressed. Unlike the iPhone or other smartphones, which have become modern-day necessities, the Apple Watch seems to remain something of a nice-to-have accessory rather than a must have device. While the original Watch benefited from the novelty factor and pent-up demand for an Apple wearable, the Series 2 will have the compete based on its utility, which still remains relatively unclear to mainstream customers.

Market Trends May Also Hurt Apple

Apple also faces challenges from the broader wearables market. All the growth in global wearables sales is coming from basic devices (that do not run third-party apps). According to IDC, basic wearables shipments expanded by 48.8% year-over-year during Q2 2016, while shipments of smart wearables such as Apple Watch (devices that support third party applications) declined by about 27% year-over-year. The low price points of basic devices, coupled with their clear-cut use cases (activity tracking/notifications) have made them popular with average smartphone customers, allowing them to capture roughly 83% of the wearables market.

Separately, the Apple Watch could also become a harder sell in China, which was viewed as a key market when the original watch was launched in 2015. Apple’s Chinese sales declined by roughly 33% during Q3 FY’16 on account of a mix of currency headwinds, higher competition and economic uncertainty.

Average Prices Set To Dip 

While Apple has raised the starting price of Apple Watch to $369 with the Series 2, it has nixed the luxury versions of the device, which sometimes sold for over $10,000. The company has also cut the price of the original Apple Watch (now called Series 1) to $269, while improving its processing power, in a move that could bring more mainstream customers and users upgrading from basic wearables into the Apple Watch fold. It is possible that demand could be skewed towards the Series 1, given that it offers similar industrial design and largely similar core functionality as the Series 2 at a $100 discount. These pricing moves could reduce the overall ASPs for the Apple watch product line.

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