The newly released Apple Watch (NASDAQ:AAPL) starts at $349 and sells for as much as $17,000, but research firm IHS is estimating that some models only cost $83.70 to manufacture.
The report breaks down the value of each component in the watch and says that the direct material costs for the Apple Watch Sport should amount to $81.20, with an assembly cost per unit of $2.50.
The significant markup seems to contradict what Apple is saying about their profits. In this week’s earnings call, the company said the Apple Watch would have lower margins than most of Apple’s other products.
But the Watch likely costs the company more than $83.70 per unit, when you account for research and development, marketing, software and other expenses. Although IHS is “keeping their finger on the pulse of component costs,” Kevin Keller, principal analyst at IHS acknowledges that “there are a lot of costs that we are not accounting for.”
Manufacturing issues reported by the Wall Street Journal could also be contributing to some added costs. The report says that the “taptic engine,” the watch’s vibrating notification system, failed some of the quality control tests, and resulted in completed units being tossed.
“Supply constraints are clearly limiting the production and will have an impact on the margins,” said Angelo Zino, analyst at S&P Capital IQ. Yet “over time we expect this to be an extremely profitable product and one that will help boost margins,” saiz Zino.
“We believe within a year the Apple Watch will approach corporate margins but the near-term costs pressure from this new product category have led to low margins the next few quarters,” said Daniel Ives, managing director at FBR Capital Markets.
The manufacturing issues likely explain why some Apple Watch shipments have been backordered until summer and could also explain the lack of availability in stores.
Some have criticized the launch as lacking the typical fanfare generally associated with Apple products.
“The longer it stays away from the stores the more the buzz goes away from the product,” said Zino. He said that the challenges with the launch were “very untypical for Apple.”
The Apple Watch is the first new product category under CEO Tim Cook’s leadership. The last time a new type of product was introduced was when the iPad was released in 2010.
The company’s shares are up 15% year-to-date and the company has a market cap of $723 billion.