Apple's Next Move? iWatch and See!

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

It is no secret that Apple (NASDAQ: AAPL) has taken a dive since September 2012.  One of the issues affecting the stock has been declining gross margins, but that's boring so let's talk about something more interesting.  Many investors, myself included, are worried that Apple may have lost its mojo on releasing revolutionary products.  Before we get to the main topic of this article, how about a history lesson?

The iPod facilitated the digital music transition away from physical discs.  Those white earbuds became status symbols of cool.  That's when things really took off for Apple.  Then the iPhone came.  Do you remember the first time you saw an iPhone?  A phone without physical buttons?  A PDA (remember those?) and a phone combined?  And it could play music?  SOLD!

The iPad came with a little less fanfare and a terrible name (I remember thinking about women's health products when the name was revealed).  It was basically a big iPhone, but it was revolutionary in its own right and consumers ate it up. Apple was riding high.  Then . . . 

Apple hasn't released anything truly revolutionary (the iPad) since April 2010.  That is almost three years ago.  They released the iPad Mini late last year.  As a consumer, I love it.  As an investor I worry it dilutes the brand and gives access to the ecosystem (read about that advantage here) for far too low of a price.  Since September 2012, the stock has lost 1/3 of its value.  

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AAPL data by YCharts

I was on the verge of selling all my shares in October of last year when some fellow Fools talked me off of a ledge in The Motley Fool discussion boards (click here for conversation).  I made the following point then: 

Apple doesn't sell iPads, iPhones, and Macs. They sell cool. They've sold cool from the beginning. Is that still there? If so, how much longer? When they come out with the iPad 4 and the iPhone 6 and they are only marginal improvements over the previous versions, will it still be cool? When does that run out?

I held on to the shares and am still having the same questions.  I'm not pumped about the rumored TV.  What I am excited about is the latest rumor, an iWatch.  What is that?  Well, take a look at these pictures from Business Insider and tell me if this isn't the most James Bondlike thing you've ever seen?  Here is a sampling:

<img src="/media/images/user_16276/iwatch_large.jpg" />

The iWatch can bring the cool back to Apple, but, to me, it needs a few of things to make it a hit:

Priced at or below $150
Few people will pay more than that for a watch.  

Proprietary device integration
What if you could get reminders and notifications (texts, twitter mentions, etc.) without having to pull the phone out of your pocket?  What if the device had near field communication (NFC) and could serve as a payment device?  The possibilities are endless.  The majority of iWatch features should only be accessible with a compatible iPhone (the latest version of the iPhone).  The iPhone is Apple's biggest revenue and profit generator.  This is where Apple can really shine.  The iWatch can be a gateway device to faster upgrade cycles.  Samsung and Google are eating Apple's lunch globally on market share.  Apple's big advantage is that they integrate their own hardware with their own software.  Although Google made the Motorola acquisition, it isn't as tightly integrated as Apple's hardware and software offerings.  It would be tough for Samsung or Google to compete with a device such as this.  That makes the iWatch one tough moat to cross (read more about business moats here). 

Fitness Activity Device
Nike (NYSE: NKE) and Garmin (NASDAQ: GRMN) dominate the health and fitness device market.  Over the past few years, Garmin's fitness segment, dominated by the Forerunner watch, has been a nice boost to the company with the declining use of GPS navigational devices in vehicles.  As a reminder, Apple (with Google) was one of the chief disrupters of that space too by providing integrated mapping services natively within its mobile operating system.  Comparing the quarterly financial results on a year over year basis since 2010 shows that Garmin's fitness devices have experienced >20% sales while their auto/mobile sales have declined >10% in the same time period.  

Nike=Fitness to consumers so it just made sense they would make the jump from shoes and clothing to a wearable fitness device with the Fuel Band.  The device that captures calories burned throughout the day couples nicely with an awesome mobile application and website.  The device has gained in popularity since its release just over a year ago.  

Here's the thing.  Apple could easily integrate the technology of these devices into a watch that also offers other functionality.  It allows consumers to combine devices and becomes an easy sell for health conscious consumers.  

The iWatch is the consumer device that can bring the cool back to Apple and rebound the stock price. What is Apple's next move?  iWatch and see!

Note: That pun was intended and I apologize for my dorkiness.

robbielaney has positions in Apple and Google.  He owns a Garmin watch for snails pace running attempts in a pair of Nike shoes.  The Motley Fool recommends Apple, Google, and Nike. The Motley Fool owns shares of Apple, Google, and Nike. 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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