Apple Inc (NASDAQ:AAPL)’s Upcoming iWatch Will Make Waves In A Whole New Industry

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By Mark Michaels on August 29, 2014 Company, Technology & Software

Not literally. But Apple Inc (NASDAQ:AAPL) has got investors and fans on their toes eagerly waiting for the release of their newest gadget product – the iWatch. Traditional watch manufacturers, including Swatch Group (OTCPK:SWGAF) are beginning to show concern.

Nick Hayek, the chief executive officer of Swatch Group, dismissed Apple’s smartwatch as a device that lacked the key features of elegance that were characteristic of his company’s luxury brands, Breguet and Omega. Shortly after this announcement, Hayek announced that the watch maker will be introducing fitness functions into its Touch line of digital watches, which is a key feature of smartwatches.

Threat Of The iWatch

Why is the chief executive officer of Swatch so worried now about the debut of the iWatch onto the market?

The Galaxy Gear by Samsung (OTC:SSNLF) and the SmartWatch by Sony (NYSE:SNE) did not seem to extract a concerned reaction from the chief executive officer of Swatch Group. So what makes Apple’s iWatch a threat?

It is extremely unlikely that Apple’s iWatch will compete against the Swatch Group’s high end Prestige and Luxury range of watches, which boasts a line up of brands including Harry Winston, Bregeut, Jaquet Droz, and Blancpain. These brands of watches retail for tens of thousands, even hundreds of thousands of dollars each.

Swatch Group also owns a range of more affordable watches that feature watches in the high range like Longines, mid range like Tissot or Hamilton, and basic range like Swatch and Flik Flak.

It appears that Swatch Group’s main strategy is to protect this basic, middle, and high range of products from potential rivals, such as Apple. Now, with the impending release of the iWatch, these ranges could come under attack.

Swatch Group’s Asia operations also make more than 55 percent of the company’s total revenues, and more than 68 percent of those revenues from Asia come from China. Therefore, Swatch Group is understandably threatened by Apple’s intensive expansion into China, and the presence of Apple’s iWatch in the market in Asia certainly pose a direct and substantial threat to Swatch Group and its sales.

Jean-Claude Biver, the chairman of Hublot, a luxury watch brand, explained that he threat of smartwatches must be taken seriously by the watch industry in Switzerland. According to Biver, the iWatch will likely carry the same status symbol as many other products from Apple. This, Biver stated, is what the threat Apple has against the industry.

But Is The iWatch Important To Apple?

Nikkei, a supplier for Apple, disclosed that Apple Inc recently ordered an initial production figure of 3 to 5 million iWatch units a month. Given the assumption that Apple will ship an average of 4.5 million units of the device a month, the company could potentially reach an average of about 55 million shipments of iWatch units during the first year of sales. Other analysts believe that the number could be closer to 60 million. Given the assumption that the iWatch will be sold for $350 a unit, that would mean an additional revenue of $19 billion for the iWatch maker, which is 10 percent of its total sales for 2015.

iPad revenues have also hit a plateau, and the upcoming debut of a phablet – the 5.5 inch iPhone 6 – could possibly cannibalize and drag down iPad sales even more. To combat this dilemma, Apple must introduce a brand new product, and the iWatch could be the answer.

Without the introduction of the iWatch, the company could see its sales decrease in 2015. However, with the additional revenue that the iWatch would bring, Apple now has the ability to intensively grow its revenues and enjoy higher operating margins.

Sales Of The iWatch In The First Year

Why would 60 million customers purchase the iWatch in the first year?

Apple has carefully built the idea of the iWatch, so that it is not just a typical smartwatch attached to an iPhone, which is the fundamental concept that Samsung and Sony has done with their smartwatches.

Instead, Apple has focused on building luxury into their product. In order to do this, Apple has also built the dream team of luxury retail. Last year, the technology firm hired Paul Deneve, the former leader of Yves Saint Laurent, to contribute his expertise on special projects that are rumored to involved the iWatch. Earlier this year in May, Apple also brought in Angela Ahrendts, the former chief executive officer of Burberry. Just last month, Apple also brought on board Patrick Pruniax, the vice president of sales of Tag Heuer. With an arsenal of contributors like this, there is no doubt that Apple can create the next disruptive premium product. If Apple is able to catalyze a revolutionary iWatch trend and persuade the consumers of the mid range and high range watches to switch from their $100 to $1000 watches, to Apple’s multifunctional, fashionable, extremely attractive premium iWatch, then Apple could successfully enter and disrupt a market that has absolutely no relation to its current ones.

With 424 retail stores in locations all across the globe, fans of Apple products will surely be lining up on the day of the iWatch’s debut. It is also rumored that celebrities and athletes have partnered with Apple to promote the product. With all these factors in mind, there is little doubt that the trend for Apple’s smartwatch will be set very quickly.

Apple’s Share Price

Taking into account the $19 billion in additional revenue that the iWatch will bring in for Apple, the company could turn those figures into 16 percent worth of additional earnings per share. This would boost Apple’s fair price to almost $118 at the figure today, which is currently undervalued.