The Apple Watch Series 4 Looks Like a Smash Hit

MarketsMotley Fool

The Apple (NASDAQ: AAPL) Watch line has clearly been a success for the tech giant. In fact, as CEO Tim Cook pointed out during the company's product launch event a few weeks ago, "Apple Watch is not only the No. 1 smartwatch in the world, it's the No. 1 watch, period."

The latest version, known as the Apple Watch Series 4, debuted at that event with a host of upgrades from its predecessor, the Apple Watch Series 3.

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These improvements, which my colleague Daniel Sparks covered in more detail here, include a zippier S4 chip, bigger screens (Apple Watch Series 4, like its predecessors, comes in two sizes), a slimmer case, "a new accelerometer and gyroscope, which are able to detect hard falls," as well as "an electrical heart rate sensor that can take an electrocardiogram (ECG) using the new ECG app, [...]."

Put simply, it's a huge leap forward for the product category.

It's not surprising, then, that TF Securities analyst Ming-Chi Kuo had some good news to share about the sales momentum of the new device. Let's take a closer look.

Boosting shipment estimates

According to Kuo, "Apple Watch Series 4 demand is much better than expected."

Further, he said, "The capacity of the assembler Quanta is full already." This means that until Compal (another of Apple's contract manufacturing partners) begins producing the Apple Watch Series 4 as well, supply can't grow significantly.

Kuo's note indicates that Compal will begin manufacturing the Series 4 in November. In light of that, he raised his overall Apple Watch shipment forecast for 2018 from 18 million units (which itself would have been a solid figure) to between 18.5 million and 19.5 million units.

Why it matters

There are two reasons that Apple investors should be happy about this news (assuming, of course, that Kuo's read on the demand situation is correct). Firstly, if sales of the Apple Watch Series 4 are better than expected, then more Apple Watch unit shipments will ultimately translate into higher-than-forecast revenue and gross profit for the company's "other products" unit.

Another thing to keep in mind, though, is that the Apple Watch Series 4 is selling at a higher price than its predecessor did when it was the flagship Apple Watch. By way of background, the Series 3 launched at $329 for the variant with just GPS, and $399 for the one with both GPS and cellular capability. The Series 4 debuted at $399 for the GPS-only model, and $499 for the GPS-plus-cellular model.

To be clear, I don't think Apple is raising prices simply to try to gouge customers, so I doubt its per-device gross margin has gone way up with this product generation. Instead, my suspicion is that the Apple Watch Series 4's cost structure is significantly greater than that of its predecessor, so the company had to boost prices to compensate.

At any rate, given the apparent popularity of the Apple Watch Series 4, the company may not merely enjoy Apple Watch unit shipment growth over the next year -- it could see average selling prices grow, too. This could accelerate Apple's smartwatch revenue growth.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.