The Apple Watch launch may be more than 12x as large as the iPad launch

With an aggressive nine country launch into a user base of more than 400 million iPhone owners, the Apple Watch will likely represent the largest new product category launch, according to sales, in Apple’s 38-year history. Given my opening weekend sales expectations, the Apple Watch launch may be upwards of 12x as large as the iPad launch. I am establishing calendar year 2015 and 2016 Apple Watch unit sales estimates of 19 and 33 million, respectively.
Apple Watch is a different kind of product for Apple with 30 unique watch models curated into two collections, not including eight Edition models that will have a limited release. While I would still expect initial sales to be constrained by supply, the somewhat wide launch window (Australia, Canada, China, France, Germany, Hong Kong, Japan, the UK, and the US) suggests Apple is confident in an opening weekend unit sales number that is at least 2 million, but not likely more than 5 million. Exhibit 1 compares Apple’s previous new product category launches. The Apple Watch’s nine country launch stands out as an outlier.

Exhibit 1: Apple’s Recent New Product Category Launches

Opening Weekend Sales

I am establishing a 3.5 million opening weekend sales estimate based primary on the list of launch countries and what I consider to be a realistic amount of available supply. It remains to be seen what supply will look like on launch day at Apple retail stores for those who don’t preorder online. I expect many to take advantage of Apple’s preview window to try out their watch selection after pre-ordering the device. Exhibit 2 highlights my expectation range for opening weekend sales with a wider expectation range of between 2.5 and 4.5 million units.

Exhibit 2: Above Avalon Estimate for Apple Watch Opening Weekend Sales (millions of units)

It is important to note that Apple may not release Watch unit sales numbers related to opening weekend or quarterly results. Management had indicated that Watch revenue would be combined with “Other Products” for reporting purposes, which includes Beats headphones and speakers, iPod sales, Apple TV, and peripherals and accessories for iPhone, iPad, Mac and iPod. There may still be a possibility that Apple discloses overall unit sales numbers if they are strong.

Unit Sales Estimates

Back in November 2014, I published my initial estimates for Apple Watch sales. Since then, I have not discovered any new information that significantly altered my view. Exhibit 3 contains my Apple Watch unit sales estimates for 2015 and 2016. It is important to note there are a number of different holding periods discussed in the press related to Apple, primarily calendar year (CY) and fiscal year (FY). Apple reports earnings according to its fiscal year.

Exhibit 3: Above Avalon Estimate for Apple Watch Unit Sales

Watch production will likely represent the biggest bottleneck for stronger initial sales. Since the Apple Watch will launch in nine countries, it would seem that Apple is confident supply would at least be large enough to support such a wide release for a first generation product. Within the nine launch countries, Apple’s retail network will play a crucial role as hands-on demonstrations and previewing may be desired by a sizable portion of potential buyers. I assume the gradual rollout to other countries will take months, with the product likely to reach an iPhone-like distribution sometime in 2016.

With a target market of approximately 400 million iPhone users, I continue to view initial Apple Watch demand will be determined by a consumer’s interest and passion with Apple products. Those individuals who have a long history of owning Apple products, and are interested in having the latest and greatest, will likely be first in line, while individuals who may be new to iOS and likely just getting use to their iPhone may not even consider buying an Apple Watch in the first few years. My previous note on Apple Watch sales estimate suggested that 15% of the iPhone user base (approximately 60 million) represents early adopters, the ones likely to buy the product early in the life cycle. With that in mind, 28 million unit sales during the first 12 months on the market would seem relatively plausible.

As shown in Exhibit 4, I am establishing a sales mix estimate that favours the Sport collection over the Watch collection. I relied on a combination of an opt-in Twitter survey that I conducted with early adopters, adjusted to reflect non-English speaking countries and more mainstream buyers.

Exhibit 4: Above Avalon Estimate for Apple Watch Unit Sales Mix for 2015 and 2016 (CY)

Average Selling Price (ASP) Estimates

Taking into account the sales mix, as well preferred watch face sizes and styles, Exhibit 5 highlights my estimate for Apple Watch ASP. Band revenue represents approximately 5% of Apple Watch Sport collection, while I would expect bands to represent a larger portion of Watch collection sales (8%).

Exhibit 5: Above Avalon Estimate for Apple Watch ASP

Revenue, Operating Income and EPS Estimates

Combining unit sales estimate with ASP, Apple Watch has the potential to bring in $US8 billion of revenue in fiscal year 2015, which would be around 3% of Apple’s total revenue. In 2016, Apple Watch has the potential of representing close to 7% of Apple’s revenue. In terms of EPS, Apple Watch may represent up to $US0.44/share for 2015, increasing to $US1.13/share (12% of total EPS) in 2016. While the iPhone’s popularity overshadows many of these strong Apple Watch estimates, one aspect to keep in mind is the Apple Watch would likely represent the second biggest product in terms of revenue and profit momentum. The iPad and Mac show no signs of similar levels of growth monetum.

Exhibit 6: Above Avalon Estimate for Apple Watch Financials (FY)

Going forward, I would label Apple Watch and iPhone as the two priorities at Apple in terms of products with both sales and structural (mobile and wearables) momentum. The ingredients are in place for a strong Apple Watch launch.

This report was produced by Neil Cybart on March 16, 2015 and is not meant to be used as investment advice. I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe.

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