(Matt Krantz) The Apple Watch was supposed to be the next magical product from the gadget maker. Not so fast, says Andy Hargreaves of Pacific Crest in a note to clients.
Hargreaves Tuesday cut his forecast for Apple Watch sales in the current fiscal year from 11 million to 10.5 million. That might not sound like much of a reduction, but he warns the bigger letdown will come next fiscal year due to “soft follow-on sales.” The analyst says the company will sell just 21 million watches in fiscal 2016, down from the earlier 24 million estimate.
“Anecdotal evidence suggests Apple Watch demand is slowing quickly,” according to Hargreaves’ note. “This dovetails with recent supply checks, which suggested a reduction in component order volume.”
The report is the latest data point indicating investors and developers need to downscale their expectations from this new gadget. In early May, brokerage firm UBS cut its fiscal 2016 forecast for Apple Watch sales – even calling the launch of the product “somewhat botched.”
A lackluster debut of a new product is a significant issue for the company – as it seeks another gizmo to match the runaway success of its maturing line of smartphones. Keeping up the torrid rate of growth will soon require a new product line as the existing products slow. Also, the watch makes yet another disappointment from a company that traditionally doesn’t disappoint. iPad sales are trending down, Apple Pay has failed to catch on and now there’s the watch. Apple itself hasn’t told investors how many watches it has sold.
Don’t cry for Cupertino just yet. While the Apple Watch isn’t looking to be the biggest thing since the iPhone, who cares, when you sell the iPhone? Hargreaves actually increased fiscal 2015 and 2016 profit forecasts for Apple by 3.1% and 3.8%, respectively. The reason? The iPhone is carrying the day again.
Hargreaves expects the company to sell 236 million iPhones this fiscal year, up 3.1% from his earlier forecast. The strength in iPhone sales and the company’s plan to return a portion of its more than $190 billion in cash to investors sustains the stock, he says. Hargreaves says the stock will be worth $139 in 12 months. If he’s right, that’s nearly 10% upside from Wednesday’s closing price of $126.60.
But unlike super bullish, sky’s-the-limit analysts, Hargreaves points out another big danger. And it’s not just the expected disappointing sales of the watch. It’s saturation of the iPhone.
Just about everyone who wants and iPhone has one or soon will, Hargreaves writes. That’s a problem going forward – since Wall Street demands growth. It’s tough to grow in a mature market. “We believe the majority of people earnings $15,000 a year or more in the world will own an iPhone existing fiscal 2015,” he says.
“Our and Street estimates anticipate further growth in the iPhone user base going forward, which creates risk if we reach the point of complete saturation or if a competitor slows Apple’s share gains,” he says.