Apple Watch Sales: Thriving or Diving?
The Apple (NASDAQ: AAPL) Watch has gotten a lot of negative press in the past few days, after IDC reported that Apple Watch sales cratered in Q3.
Apple CEO Tim Cook quickly fired back, stating that the Apple Watch is on pace for a record performance this quarter. Yet many pundits questioned his statement, noting that he didn't offer any hard numbers. What are investors to make of these sharply divergent narratives?
Apple needed new products this summer
The first-generation Apple Watch went on sale in April 2015. However, the company didn't have a follow-up model ready for the anniversary of its introduction this year. While Apple cut the price of the Sport version by $50 in March 2016 and introduced some new bands, it was no substitute for offering a new model with better features.
This caused Apple Watch unit shipments to plunge 57% year over year to 1.6 million during Q2 of the calendar year (roughly equivalent to Apple's Q3), according to estimates from IDC.
Apple Watch sales appear to have fallen significantly in the past two quarters. Image source: Apple.
On Monday, IDC reported that Apple Watch shipment trends worsened further last quarter. Unit shipments plummeted 71% from the previous year to just 1.1 million. That was enough to drop Apple from No. 2 to No. 4 in terms of wearables market share.
The next-generation Apple Watch Series 2 finally arrived on store shelves two weeks before the end of the quarter, offering a big upgrade over the first-generation product. However, initial supply was very limited. Any benefit from early shipments of the new model was more than offset by channel inventory reductions for the first-generation Watch.
The new Watch seems to be helping
Given that Apple now has a new product on the shelves and Apple Watch Series 2 supply has caught up with demand, it's no surprise that sales are improving. Apple also cut the price of the first-generation Apple Watch even further upon releasing the new model, stimulating additional sales.
The new Apple Watch Series 2 is driving a return to growth for this product line. Image source: Apple.
According to Tim Cook, the first week of the holiday shopping season was the best ever in terms of Apple Watch sell-through. (That measures true demand from end users, rather than shipments to retailers, where inventory can sometimes linger on store shelves for a long time.)
Apple Watch shipments totaled 4.1 million during the year-ago quarter, according to IDC's estimate. Cook indicated that Apple is on pace to surpass that performance this quarter, but he didn't offer any hints as to how much year-over-year growth he anticipates.
Is Cook manipulating the numbers?
Several reporters have pointed to the recent IDC report of plunging Apple Watch shipments and questioned whether Cook is somehow twisting the truth with regard to Watch sales. Some of this criticism may be due to confusion about what Cook meant by sell-through. As noted above, sell-through actually provides the best indication of demand by stripping out inventory fluctuations.
Furthermore, Apple announced long before Watch sales began that it would not report unit shipment figures for competitive reasons. (Another likely reason for this lack of disclosure is that Watch sales represent a small part of Apple's total revenue.) The lack of hard numbers is the result of long-standing corporate policy -- not some attempt by Cook to pull a fast one on investors.
Some Apple bulls have shot back, arguing that IDC must have dramatically underestimated Apple's Q3 Watch shipments. Indeed, Canalys (a competing market research company) estimated that Apple Watch shipments totaled 2.8 million last quarter, about 150% higher than the figure cited by IDC.
Be that as it may, Apple's revenue from "other products" declined 22% ($675 million) year over year last quarter. The Apple Watch is one of the biggest contributors to this revenue line, so the steep drop in revenue suggests that Watch sales did decline on a year-over-year basis. But given the timing of the Series 2 launch near the end of the quarter, there's nothing odd about the idea that Watch sales declined sharply last quarter and returned to strong growth this fall.
A return to Apple Watch growth is nice, but not a big catalyst
If Apple Watch sales are set to return to growth this quarter, that's good news for Apple, but hardly a game changer.
After all, Apple's other products segment produced just 5.7% of the company's revenue in the year-ago quarter -- and the other products category also includes the iPod, Apple TV, Beats products, and various accessories. Perhaps if Apple Watch sales doubled or tripled this quarter, it would be enough to move the needle. But anything less than that would be just a rounding error relative to Apple's tens of billions of dollars in quarterly iPhone sales.
It's still possible that the Apple Watch could eventually become a hit product on the scale of the iPhone -- if health insurers start to routinely subsidize Apple Watch purchases for their customers. Aetna recently began to do just this. It even distributed Apple Watches to 50,000 of its own employees to encourage them to pay more attention to their health.
Until and unless this practice becomes widespread, any victories for the Apple Watch are likely to be small ones.
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