Yesterday was Fitbit's turn for shares to fall on lukewarm reviews of its all-important Ionic smartwatch. Today, it's Apple's (NASDAQ: AAPL) turn. The stock was down by 2% around 12:40 p.m. EDT Wednesday after the first batch of Apple Watch Series 3 reviews started to hit the web ahead of the product's launch on Friday.
Are investors overreacting?
LTE might not be worth it
Several reviewers noted that Apple Watch Series 3 had connectivity issues and did not consistently connect to LTE networks, which is particularly damning, as cellular connectivity is the headline feature this year.
For example, The Verge's Lauren Goode had connectivity issues with her review unit. Apple sent her a second review unit, which also had similar issues. Likewise, The Wall Street Journal's Joanna Stern ran into problems with LTE. It turns out that there is a software-related issue with how the Series 3 sometimes hands off its connection from Wi-Fi to cellular, and Apple is looking into a fix that will be released later on via a software update.
Even when LTE was working fine, the broader issue was that the feature offers questionable value to most users and may not warrant the extra costs. For starters, using LTE is a significant drain on battery life, which was already a soft spot for Apple Watch in general and the most meaningful department in which the Ionic pulls ahead. Being able to call and text directly on Apple Watch independently of an iPhone may sound convenient on paper, but in reality, most people will still probably have their iPhones with them anyway.
Most Series 3 models come with LTE and saw price increases related to the feature of $50 to $70 compared to last year's models; LTE is only optional on the base models. On top of that, it costs $10 per month for cellular service. That may be a lot to ask for a convenience that is rarely used and comes with a functional trade-off in battery life. I'm skeptical that cellular connectivity would be a catalyst for mainstream adoption.
This is fine
The reviews aren't particularly flattering, and it probably doesn't help investor sentiment that iPhone 8 and 8 Plus reviews were also pretty uninspiring. To the extent that shares are dropping from Apple Watch Series 3 reviews, that reaction would be misplaced, since Apple Watch is not a particularly important product financially for Apple. The company still doesn't disclose financial results for its smartwatch, which is included in its broader "Other Products" category that makes up just 5% of sales.
If we use third-party estimates, Apple shipped 12.7 million Apple Watch units over the past year, according to IDC. If we estimate average selling prices of around $500, that's roughly $6.4 billion in revenue -- not an insignificant sum in absolute terms, but a mere 3% of total revenue ($223.5 billion) over the same time frame. That's in stark contrast to the Ionic, which Fitbit is relying on for its broader turnaround.
The product whose reviews will really matter is the iPhone X, which ships in November. If that device fails to impress, then investor pessimism would be absolutely warranted. Apple Watch? Not so much.
10 stocks we like better than AppleWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of September 5, 2017