While Apple Inc.’s AAPL pet project Apple Watch has been on the market only for a short period, analysts have already started commenting on its success as a flash in the pan affair. Reportedly, the company is facing supplier problems that might affect its sales in the coming quarters. While analysts from JPMorgan Chase & Co. JPM estimate that Apple will sell 36 million watches in the first 12 months of the release, others have adopted a more cautious outlook by predicting figures close to 15 million.
Going by a CNBC report, the company is facing supply constraints since it began ramping up production. Earlier JPMorgan had predicted Apple Watch shipments to be about 26.3 million units in 2015 while Bernstein Research estimated it to be 7.5 million in the second half of 2015 and 20 million in 2016. We believe the initial enthusiasm surrounding the release that led to about 1 million orders in the U.S. on the first day of the launch was one of the key reasons why JPMorgan increased its sales predictions. This was before the current supply constraint issues cropped up.
Further, reports suggest that following its launch, the product is witnessing a slowdown in demand. Recently, KGI research lowered its Apple Watch shipment projection by 20%-30% citing declining demand for the product. The research firm now predicts shipments of 5-6 million units in the third quarter and 15 million units in 2015. Though there wasn’t any specific reason cited for the waning demand, we believe certain drawbacks such as lower battery life, lack of GPS or cellular connectivity, complicated usage and the less user-friendly digital crown of the watch are the likely culprits.
Further, the company is facing certain issues with the watch such as a faulty Taptic Engine and it’s not clear whether they have fixed this issue yet. This key component of the Apple Watch was found to be defective, which led to production delays and also negative reviews of the product. These problems when pitched against the premium pricing of the Apple Watch do make it less attractive for even niche buyers.
However, we believe that once these technical glitches are resolved by Apple, the company’s smartwatch is likely to play an instrumental role in shaping the wearable device market. According to reports, global sales of wearable devices are expected to accelerate in 2015, soaring 158% year over year to 75 million units. Of these, smartwatches are expected to be the primary growth drivers contributing 44% of total sales by 2018. Hence, there remains a sizable opportunity for Apple Watch to grab a significant share of the market.
Apple currently has a Zacks Rank #2 (Buy). Other stocks with Zacks Rank #2 include Synacor, Inc. SYNC, and Gaiam Inc. GAIA
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