Stocks to Watch in Smartwatches

By Markets Fool.com

The smartwatch market is still in its infancy, and it's the first and most visible aspect of the coming wave of mainstream wearable computing. As consumers begin to adopt smartwatches, here are the three most important companies and stocks to watch that will be affected.

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Apple
As usual, Apple isn't the first company in this market, but it will be one of, if not themost, influential players. Consider this: There were an estimated total of 6.8 million smartwatches shipped throughout 2014, before Apple entered the market. On average, analysts estimate that Apple could potentially ship around 22.5 million Apple Watches throughout 2015. If that plays out, Apple will single handedly more than triple the market's volume, even though it only entered the market in the second quarter.

Apple Watch will be positioned at the premium end of the market. Source: Apple.

Just like the smartphone market, all companies hoping to participate in the growing smartwatch market will need to look toward Apple and see how they stack up. Apple will set the bar for consumer expectations, even for customers who prefer to buy competing devices. Simply put, you can't ignore Apple as the smartwatch market unfolds.

Google
It should also come as no surprise that Google's Android Wear will likely emerge as the other dominant smartwatch platform to compete with Apple. Android Wear had a slight first-mover advantage, but did relatively little to catalyze the market and consumer adoption. Even if Apple grabs the majority of the market in the first few years, Android Wear could very well rise up and overtake Apple in the longer term for all of the same reasons why Android is the predominant smartphone platform in the world.

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Android Wear will offer more variety than Apple Watch. Source: Google.

Because Android Wear will leverage a wide array of hardware partners all competing with each other, they will inevitably succumb to pricing pressure, and Android Wear smartwatches will become available at a much wider range of price points. Meanwhile, Apple will likely maintain its premium positioning, especially when we start talking about its Apple Watch Edition models that start at $10,000.

Google doesn't break out Android-related revenue explicitly, so investors shouldn't expect it to give too much detail for Android Wear, either. But that doesn't discount the strategic importance that Android Wear will have for Google's position in the wearables market, especially after Google Glass failed to gain traction.

Fitbit
Most smartwatch platforms are being built with a heavy emphasis on health and fitness tracking. That means that prominent players in the stand-alone fitness-tracking device market are potentially vulnerable to being disrupted themselves, even as that market itself is also quite young.

Fitbit has quickly emerged as a market leader in the fitness-tracking device market, and the company went public just days ago, giving public investors a chance to buy in. Fitbit grabbed a 59% revenue share of the U.S. market in 2013, 70% in 2014, and 85% during Q1 2015, according to its prospectus.

Growth has been nothing short of astounding, growing from $76.4 million in 2012 to a whopping $745.4 million in 2014 -- nearly 900% growth over just two years. On top of that, Fitbit is already profitable, enjoying $131.8 million in black ink last year. Investors are already drooling over those figures, with shares jumping 48% on the first day of trading, even after the offering priced at $20, higher than expectations.

Fitbit has been steadily expanding its product portfolio. Source: Fitbit.

The big risk here is that the growing smartwatch market will begin to eat into the activity tracker market. To some extent, smartphones have done the same thing to the GPS and point-and-shoot camera markets. Fitbit acknowledges this directly in its prospectus:

In addition, many large, broad-based consumer electronics companies either compete in our market or adjacent markets or have announced plans to do so, including Apple, Google, LG, Microsoft, and Samsung. For example, Apple has recently introduced the Apple Watch smartwatch, with broad-based functionalities, including some health and fitness tracking capabilities. We may also face competition from manufacturers of lower-cost devices, such as Xiaomi and its Mi Band device. In addition, we compete with a wide range of stand-alone health and fitness-related mobile apps that can be purchased or downloaded through mobile app stores.

Fitbit may not technically be a smartwatch stock, but it will undoubtedly be affected by how the smartwatch market evolves in the coming years.

The article Stocks to Watch in Smartwatches originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.