Apple to Take Market from Fossil

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few weeks ago, news begun to spread about a new Apple (NASDAQ: AAPL) “iWatch” product, which if true could make way for a number of new devices for the tech giant. The news seemed to spark the innovation edge that investors had sought, as the stock traded higher in the week prior. However, while many try to digest its meaning, I can’t help but to think that this could be disastrous for Fossil (NASDAQ: FOSL).

Does an iWatch Make Sense?

Last week I read an article, following reports from The Wall Street Journal and The New York Times about Apple testing watch designs, entitled “Five Reasons Why Apple Will Fail.” The points made in this article were reasonable, such as: Watches being a hard sell to tech-savvy consumers, Apple is not best-positioned for this space, CEO Tim Cook is a board member for Nike, and Apple will price itself too high. While these points are logical, you can’t forget that there are millions of consumers, such as myself, that will buy any new Apple product just to expand our ecosystem of products, and such a device could become a hot commodity as an accessory to many consumers.

Allow Speculation to Run Wild

Over the last two weeks there have been countless images of what Apple’s new iWatch may look like. Some believe that this is just a rumor, and are tying the rumor to recent news of Apple TV and Apple cars. However, Apple has been good in the past about allowing certain product launches to slip into the media. And for the most part, the company has a fairly good record at producing product from rumors, unlike Google who still earns most of its revenue from advertising while “rumors” slip of greater innovation.

Analyst Gene Munster, who has been incredibly accurate regarding Apple and its business, believes an iWatch is likely, saying, “it’s unlimited, the number of wearable things you can tap into.” When you think about it, he’s right -- we wear necklaces, rings, watches, belts, purses, wallets, etc. and this would give Apple a better presence into the retail/fashion space. Therefore, the company becomes more diversified with more products, which is what analysts/investors have been requesting.

Will Apple Affect Fossil?

While the “iWatch” will most likely be more of an iPod than an iPhone, it will be priced at a premium and will be sought by many consumers. Fossil is a company that has found it difficult to remain consistent over the last two years. During the last 12 months the company has recorded revenue of $2.86 billion, which is only a fraction of the total worldwide watch market, making it very attractive for Apple. And with Fossil being in the luxury retail business, this will be the business that Apple would take away.

Conclusion

At this point with Fossil seeing double-digit growth and a forward P/E ratio of 15 it’s not a short candidate yet. However, once Apple releases this new product I believe we will see that luxury consumers will make the switch from Fossil to Apple.

In my opinion, Fossil looks to lose the most, as it simply does not have the technology to compete with a company such as Apple. In terms of upside for Apple, the company already has sales of $164 billion, therefore the $5 billion-$10 billion that it could earn from watches won’t make too much of an impact from a valuation point of view. The importance of this catalyst is not the watch itself, but rather Apple increasing its product line and entering new spaces. Then, as a result, with the stock being cheap, it should rise as investors see proof of innovation; meanwhile Fossil could and most likely will decline. 


BrianNichols owns shares of Apple. The Motley Fool recommends Apple and Fossil. The Motley Fool owns shares of Apple and Fossil. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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