The Underwhelming Demand For The Apple Watch by Tony Sagami, Mauldin Economics
My father was a vegetable farmer, and he truly believed that hard, hard work was an entrance requirement to get into heaven. And he expected his sons to work (almost) as hard as he did.
The hard work that my brother and I put in on the farm, however, seldom came with a paycheck. My brother and I used to complain that Lincoln forgot to abolish slavery for the children of farmers because we sure didn’t get paid for the work we did on our western Washington farm.
“You eat my food, I buy you clothes, and you live in my house! I pay you plenty,” my father used to say gruffly.
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I certainly didn’t appreciate it at the time, but my father passed on a very strong work ethic to his children, and I’ve tried to do the same with my children. I always make sure that my kids have a generous list of chores, but there’s no substitute for life on a farm.
However, I’ve found other ways to put them to work.
What I’ve found is that my children have been an extremely accurate source when it comes to investment research on consumer trends. Thanks to the, “Please, please, please Dad” demands for things like Nike tennis shoes, Under Armour clothes, iPod music players, Facebook, video games, meals at Buffalo Wild Wings, and iPhones… I’ve been able to get in on the early stages of several retail stock moon shots.
My kids may not have slaved away in the fields, but they’ve made me a lot more money than my brother and I ever made for our father thanks to their dead-on insights on consumer trends for teenagers and young adults.
Apple just started taking orders for its new Watch, and lots of my Wall Street friends are salivating over the gigantic profits that the newest Apple product will generate.
That’s why I put my kids to “work” again this week when I asked them for their opinions about Apple’s new watch.
Kid Comment #1: I would say a lot of people think it’s unnecessary, but that’s partially because it’s Montana and partially because the idea of wearing a watch has always been unnecessary to us growing up. Also students think of a smartphone as a necessity which is why we pay for it, but an Apple watch seems more like a yuppie kind of thing.
Kid Comment #2: I’ll be honest; I haven’t heard much clamor about the new watch. I’m not sure I’ve even heard it mentioned in any passing. I’m still not quite sure what to think of it. It definitely has not received the type of hype the original iPhone had.
Kid Comment #3: I think it’s stupid. And so do a lot of other people. Number-one reason why: watches aren’t actually used anymore; they are fashion accessories and an Apple watch isn’t cute. Two: No one wants to spend that kind of money on a watch when they already have a phone. Three: Ever since Steve Jobs died, Apple hasn’t been as amazing. The only good things are the updates on things that he (Jobs) created.
So… at least according to my kids, the Apple Watch is going to be a flop, but the strength (or lack thereof) of demand is only one of the issues that I think will make the watch a disappointment for Apple.
Issue #1: What kind of upgrade cycle will the Apple Watch have? Consumers were eager to get their hands on the newest version of the iPad and iPhone, but I’m skeptical that people will feel the same need to upgrade a wristwatch. Instead of the 2-3 year upgrade cycle that Wall Street has come to expect, I think the upgrade cycle for the Apple Watch could be double that.
Issue #2: The price ranges from $349 for the entry-level Sport model to $17,000 for the top-tier, 18-karat gold editions. Remember, the Apple Watch is an accessory to the iPhone, so I am again skeptical that other than consumers with more money than brains, anyone will buy anything other than the basic Apple Watch Sport edition. Without big sales of the high-ticket, the profit margins won’t wow Wall Street.
Issue #3: I was in Beijing when a new iPad model was released; the lines snaked around several blocks and required a small army of police to keep the crowd in order. The early sales data of the Apple Watch show that American consumers, like my kids, are not impressed. According to Slice Research, Apple sold roughly 1 million watches on the first day at an average price of $503 per watch.
That’s a whopper of a thud, especially considering that Apple offered its Watch over the Internet instead of making people physically wait in line like the iPhone and iPad.
Moreover, we’re only talking about $503 million—not much in the big scheme of things considering that Apple pulled in $200 billion in sales over the last 12 months.
Issue #4: What does Apple’s stock know that we don’t?
Despite the anticipation of the Apple Watch and dreams of it being the next blockbuster product for Apple, Apple’s stock has gone nowhere in the last two months. While the media are crowing about the Apple Watch, that excitement has not translated into a higher stock price for Apple.
Neither I nor my Yield Shark subscribers own Apple stock, and my expectation is that we’ll have a chance to buy it at a much cheaper price later this year. To see what I do like for my Yield Shark readers right now, click here.
Of course, timing is everything when it comes to investing, so I suggest that you wait for my next buy signal. And if my children are right about the lackluster demand for the new Apple Watch and if you already own Apple, you should consider the use of a stop loss to prevent your profits from disappearing.
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.