Conflicting Views on Whether the Apple Watch 2 Will Disappoint

By Markets Fool.com


Source: Apple

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Roughly one year after its highly publicized debut, investors only have a vague idea of exactly how large Apple's smartwatch business has grown.

Though its management loves describing the Apple Watch's performance in fawning terms like "exceeded expectations," this only describes one facet of the Apple Watch's reception with consumers.

With the second-generation Apple Watch due out later this year, hopes are high that Apple will seize on the watershed potential some believe the smartwatch offers. Unfortunately for those optimists, one well-known Apple analyst recently predicted otherwise.

One vote against the Apple Watch 2
Last week, KGI Securities analyst Ming Chi Kuo penned a note to investors containing a number of predictions about the Apple Watch 2. According to Kuo, the device will only provide modest improvements over its predecessor, akin to the S-series follow-up devices Apple has utilized as part of its two-year iPhone form factor cycle.

Based on his checks into Apple's Asian supply chain complex, Kuo claims the Apple Watch 2 will utilize the same form factor as the original Apple Watch, a fact he believes will lead to disappointing Watch sales for the fiscal year. All told, Kuo believes Apple Watch shipments will actually contract by as much as 25% in 2016. According to his analysis, Apple will sell only 7.5 million Watches, down from the 11.6 million it sold in 2015 according to IDC estimates. Importantly, this differs to fair extent from at least another well-known analyst's recent Apple Watch 2 predictions.

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Not the only one
Earlier this month, longtime Apple analyst Brian White of Drexel Hamilton published an investor note after returning from a spate of meetings with executives at Apple supply chain partners in Asia. Flying somewhat in the face of Kuo's views, White predicted that the Apple Watch 2 would be between 20% and 40% thinner than the original. White also believes Apple will use its upcoming World Wide Developers Conference (WWDC) in June as the venue to debut the Apple Watch 2.

Source: Apple

Though far from certain, this purported launch window does make sense. Especially if the Apple Watch 2 lacks some of the game-changing features enthusiasts have long awaited, launching in the summer could serve the tactical purpose of leaving Apple's fall launch event to focus on the iPhone 7. Either way, both reports paint the forthcoming Apple Watch release as being more incremental than incredible. Should investors be worried?

How meaningful a problem is it?
Determining just how problematic an uninspiring second-generation Apple Watch might be for the company and its shareholders depends on your interpretation of these rumors, should they prove close to accurate.

One could view this result as supporting the idea that the pace of innovation is indeed slowing at Apple. Though it was once the undisputed design leader in consumer electronics, as any number of commentators have noted (myself included), it's been some time since Apple debuted a product that truly represented a major advancement or milestone in its market. Is incrementalism -- a pattern of offering great but not revolutionary products like the iPhone 6 or iPad Pro -- a sign that the inherent tension between managing Apple's finances and developing new products has finally hobbled the firm?

On the other hand, might these seeming design issues simply speak to the hardware challenges inherent in creating a truly intelligent smartwatch? Much has been made of the promise in areas like preventative medicine that could extend from smartwatches becoming real-time trackers of biometric data like blood sugar levels, blood-oxygen levels, and more. However, leading publications have repeatedly suggested the technological breakthroughs required for such feats might prove significantly more difficult than some industry-watchers imagine.

Then again, perhaps Apple is simply focusing the bulk of its design efforts on its most high-impact areas, like the iPhone, and ambitious initiatives such as its automotive effort, Project Titan. Or, maybe the truly game-changing Apple Watch is just one generation away. Each of these arguments, and several more, strike me as at least reasonably plausible. Given that, I'd suggest that attempting to diagnose the "real" source of Apple's purportedly less-than-inspiring Apple Watch 2 plans is -- for now -- a futile effort.

What's more, though it seems visibility into Apple's supply chain has perhaps increased as the firm has grown, the analysts' claims referred to above remain rumors at best. Both Kuo and White have respectable track records in predicting Apple's product and business decisions, but no analyst gets every call right. As such, I'd say branding the Apple Watch 2 as already dead in the water strikes me as a bit premature.

The article Conflicting Views on Whether the Apple Watch 2 Will Disappoint originally appeared on Fool.com.

Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Apple. 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.