Does Fitbit Stand to Lose the Most From Apple Watch?

Image source: Apple.

Make no mistake: The wearables market is here to stay. Even though the market is incredibly young, it's already evolving very rapidly. A shift from relatively basic devices toward more full-featured devices is already well under way. IDC has just released its estimates for second-quarter 2015, and Apple has hit the ground running, promptly jumping to the No. 2 spot during Apple Watch's first quarter of availability.

In fact, the Mac maker may already be catching up with current leader Fitbit , even though Apple Watch was only available for a fraction of the second quarter following the April launch and subsequent supply constraints.

Can I get your digits?Let's start with the numbers. IDC estimates that the total market soared by 223% in the second quarter, largely driven by the entry of Apple and Xiaomi. The Chinese upstart launched Mi Band last summer.

Source: IDC. N/A because prior year had no unit shipments.

IDC notes the transition from "basic" wearables like fitness trackers to "smart" wearables like Apple Watch that can run third-party apps and do other functions.

Did Apple really ship 3.6 million Apple Watches?Honestly, I'm a little bit skeptical of IDC's estimate of 3.6 million Apple Watches. I don't think there's any possible way that Apple sold the 4 million to 4.2 million units that Strategy Analytics and Canalys estimated last month, since those volumes would imply an unrealistically low average selling price. I believe an ASP of approximately $500 is realistic.

IDC's 3.6 million estimate isn't that far away from 4 million, either, but it's doable. Let's run through the same exercise. If Apple sold 3.6 million units at $500 a pop, that would translate into $1.8 billion in Apple Watch revenue. The other products category that includes Apple Watch totaled $2.6 billion last quarter, and we know that more than 100% of the roughly $900 million increase was attributable to the new device. But that would suggest that everything else within the category fell by roughly 50%. If Apple Watch revenue was $1.5 billion, implying a 35% decline in everything else in the category, then Apple Watch ASP would be $417 at 3.6 million units.

These scenarios don't necessarily sound probable, but they are possible.

Will Fitbit fall?It's been rather difficult for investors to figure out freshly public Fitbit's prospects. The company debuted earlier this year, and has been on quite the roller coaster. The IPO priced at $20, shares closed at $30 on the first day of trading in the secondary market, topped out near $52 earlier this month, and fell by 9% following IDC's release and closed around $35.

I've been trying to figure it out too, but the answer is unclear. On one hand, it's possible that there's potentially little overlap between Fitbit's and Apple's customer base, given the disparate pricing ranges. Fitbit has a problem with high abandonment rates, which Apple Watch probably won't have. But so long as Fitbit can target and address hard-core fitness enthusiasts, it might still be ok. Fitbit is moving upmarket, after all.

The challenge for Fitbit moving forward is navigating the secular shift toward smart wearables. The company is doing its best to add new features to bolster engagement (and prices), but that also puts it in more direct competition with Apple. And directly competing with Apple is hard.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns 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.

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