Capital Market Laboratories

Any argument that the Apple Watch segment is too small or that the product is not needed is one which time and again has proven to be totally erroneous when it comes to Apple products. Apple is the best in the world at understanding the difference between creating products that people need and products that people want. Need has very little to do with Apple’s success.



I don’t own an iPhone, iPad or iPod. I never have owned any of them. I’m not an Apple fan boy. But, Apple creates want better than any firm ever, and then sells to that want better than any firm ever. It has created as strong a brand loyalty as any firm ever, and through the generations of products has an immense base of customers that continues to grow at double digits even at already staggeringly high numbers. The Apple Watch builds right on top of the Apple ecosystem.

For our first image we included all technology firms with market caps greater than $50 billion. On the x-axis we have equally spaced the companies and on the y-axis we have plotted revenue per employee ($ millions).


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Apple generates more revenue per employee than all of large cap technology even though the firm’s 100,000 employee count is several-fold the number of employees of FB (~9,000), GOOGL (~50,000) and QCOM (~30,000), the three companies that come closest to Apple in this metric. Apple is more efficient even at gargantuan scale.

With the iPad, Apple demonstarted its ability to invent a new product segment and grow the size of that segment to inconceivable levels. With the iPhone, Apple demonstarted it can enter an established market segment and grow that segment to inconceivable levels while grabbing massive market share. The Apple Watch is both of these phenomena at once: an enormous established market of smart devices living on Apple’s ecosystem, and a new market segment of wearables.

The Apple Watch could take AAPL past the one trillion dollar market cap level, regardless of overall systematic market risk. Let’s next examine the stock returns for AAPL versus GOOGL and MSFT since 2009.

We can see Apple’s 1,000%+ return, while Microsoft and Google have returned just 290% and 130%, respectively. Apple’s market cap has increased 10-fold since January 2009 to become the largest company ever. The company is even larger than the US Defense budget and TARP.


Let’s next turn to a revenue (TTM $millions) milestone chart for AAPL through time.


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Note how quickly Apple’s revenue exploded once the iPhone (and later the iPad) was released. Other than AAPL, a $75B market cap firm has never grown 1,000% over any time period, and certainly never over six years. That’s the unprecedented power of a single Apple product. Here comes the Watch.

Let’s next turn to a comparison chart through time of net income (TTM $millions) for AAPL versus GOOGL and MSFT.


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When AAPL introduced the first iPhone in June of 2007, it had smaller earnings than both Microsoft and Google. Today AAPL earnings are twice as large as MSFT and three times as large as GOOGL even as we moved through the “Great Recession” and into the following economic boom. The iPhone single handedly made AAPL the largest company in the world. A single product can impact Apple’s earnings at a monumental level.

When Apple releases a new product it not only dominates market share, but it also increases the market size in and of itself for that product. Here are some breathtaking facts surrounding smart phones before and after the iPhone.

1. In the full year of 2006, total worldwide smart phone deliveries totalled 64 million units. Source: http://www.canalys.com/

2. In June, 2007, Apple introduced the iPhone.

3. In the last three months of 2014, AAPL alone delivered 74 million iPhones worldwide. That’s more units in three months from one company than the total units delivered in the full year 2006 by all companies before the iPhone was introduced. Source: statista

4. In the full year of 2014, 1.2 billion smart phones were sold (a 20-fold increase in total market size since the introduction of the iPhone). Source: TechCrunch

Apple has turned an industry segment on its ear before. In fact, it was the iPod that took AAPL from technological irrelevance to being one of the most important innovators, well before the iPhone.

After the iPhone, Apple introduced the world to tablets. In 2009 tablet sales were essentially zero because the segment didn’t exist (like the Watch segment today). In 2010 (Apple introduced the iPad in April 2010), tablet sales hit 11 million units worldwide. In 2014, shipments hit 230 million units (source: statista).

This is an example of AAPL turning a segment which didn’t exist into one which (if we include “Phablets”) is headed well above $100 billion a year in sales.

The Point
Apple has introduced new technologies which have exploded onto the scene into massive business lines. Apple has also entered existing business lines (smart phones) and simultaneously taken massive market share while also exploding the size of the market.

I believe Apple is poised to do the same thing with the Apple Watch.

It doesn’t matter how big the segment size is now, whatever it is Apple will increase it several-fold.

It doesn’t matter if there are other competitors in the market or if others will soon enter the market; AAPL will dominate market share.

It doesn’t matter if our current economic boom (long in the tooth) hits a wall, Apple grows markets and market share during recessions and accelerates them coming out of recessions.

It doesn’t matter if people need a wearable device; Apple doesn’t sell what we need, the firm sells what we want, even if it first has to show us that we want it.

Summary
The argument that the Apple Watch segment is too small is one which time and again has proven to be totally erroneous when it comes to Apple. The impact of the Apple Watch can easily take Apple above $1 trillion market cap based on its existing ecosystem, to create a totally new market segment that will simultaneously benefit several other large players.

Apple is poised to change the world again – even if we don’t “need” it. And while we’re at it, let’s not forget about Apple Pay, an immensely high margin business that could (should) explode in usage with the Apple Watch (swipe your wrist to pay for your Starbucks). There’s also Apple’s TV streaming business, a large business segment which has been opened and grown by Netflix; ripe for competition just like smart phones were. Finally, there is the seemingly inevitable entrance of the Apple Car. All told, Apple is going to win, again.

Risk
Of course, there is risk. If the Apple Watch does not become a substantial success, then as we have seen from the earlier visualizations, AAPL relies firmly on a product which is now in its seventh generation. Keep in mind that people rarely actually pay for an iPhone explicitly, but rather buy (and upgrade) through annual phone contracts. Each Apple Watch purchase will be explicit – real money coming directly out of our bank accounts. That’s a big change, likley reduces upgrade frequency and may be a substantial hindrance to an initial purchase.

The success of the iPhone is so great that it cannot be replicated with a handful of moderate successes; it can only be replaced by an enormous success. I emphasize, while I believe the Apple Watch will yet again stun the industry, if it does not, Apple stock has substantial risk.

You can follow Ophir Gottlieb on Twitter @OphirGottlieb

You can make these visulaizations yourself here: CML Lite