IWatch Could Add $25 to Apple Inc. (AAPL) Shares: RBC

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Apple aapl iWatch potential

Recent media reports have suggested that Apple Inc. (NASDAQ:AAPL) could be working on a wearable computer product (iWatch). While analysts at RBC have no specific time-line for this product, they believe this does represent a material opportunity for Apple Inc. (NASDAQ:AAPL) to further leverage its ecosystem. In a new report, RBC analysts highlight their key assumptions for the possible launch of an iWatch.

In their view, the addition of an iWatch could add an incremental $7-9B in revenue and $1.50-2.00 in EPS over the NTM period post launch. Assuming the Company sells roughly 40M units in the first twelve months, a third of total iPhone shipments in FY12, the analysts believe the incremental $1.50-2.00 could add roughly $25 to Apple’s stock price and act as a slight tailwind to revenue growth as well. RBC maintains their outperform rating and $600 price target.

Addressable Market: RBC believes the best way to size the iWatch market would be on a fractional basis relative to Apple Inc. (NASDAQ:AAPL)’s current install base and product sales. The addition of an iWatch would likely be linked to iPhone/iPad sales as consumers purchase one of these mobile devices first and adopt an iWatch in the future to integrate further into the ecosystem. Their 40M unit estimate is roughly 33% of total iPhone sales for FY12, as they expect 1 in 3 iPhone customers would likely adopt an iWatch as well.

What Could iWatch Do: A quick look at the possible functionalities of an iWatch include 1) Sync with iMessages & iCloud 2) Find functionalities (lost iPhone/iPad), 3) Proximity passcode unlock, 4) Near Field Communication for Payment, 5) Music and maps and 6) Integrate with the iPhone for test messages and calls. RBC analysts think that the addition of an iWatch would add to the Apple user experience and integrate customers further into the Company’s vast ecosystem. While the product will unlikely cause the adoption of new Apple customers it would likely increase the “stickiness” of Apple products and expand the Halo Effect.

Competitive Pricing: With the recent price reduction of the Retina Display MacBook, high-end MacBook Air and release of the iPad Mini, RBC believes the pricing of an iWatch would likely fall between the iPad Mini line ($329) and iPod Nano ($149). Given the smaller form factor, a $175-225 price band is reasonable.

One More Catalysts To The List: The analysts believe that the iWatch becomes another catalyst that could drive Apple Inc. (NASDAQ:AAPL)’s stock higher from current levels. Notably, the list of potential catalysts seen are 1) iTV launch, 2) China Mobile deal, 3) Larger iPhone for emerging markets and 4). Favorable capital allocation.



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