Apple Watch Good Enough

UBS

iPhone drives revenue now; Apple Pay and Watch lay foundation for future
The iPhone 6, quickly on back order, should satisfy near-term revenue growth needs with a chance for 100mn total iPhones shipped in the second half. The Apple Watch and Apple Pay lay a foundation for the future. Apple Pay may provide less revenue than hoped as it is not disruptive and Apple will not try to monetize transaction data, but it is an important ecosystem builder. The Watch is the hardest to gauge but promising. While the need for an iPhone 5/6 is limiting, we are optimistic on Watch demand.

 Focusing on what is unique to Apple Watch
Apple observer Ben Thompson pointed out a question we had as well after the introduction—what is the job to be done? New categories from Apple elegantly solve a problem with the help of a breakthrough in interface technology. The Digital Crown fits into that lineage. But there appear to be almost too many jobs with over 50 applications, some merely extensions of the phone and some new. Apple needs to highlight the jobs unique or advantaged to the Watch, such as

(1) paying without reaching into the pocket/purse,
(2) responding to texts by voice without resorting to the phone, and
(3) receiving directions through touch prompts.

Version 1 should sell well
Still, communication remains the killer app in technology, which Apple recognized with a separate comm button to access Friends and the Walkie-Talkie feature. Furthermore, the detail that went into the design, including the watch bands, is impressive and not fully appreciated yet. We look for 24mn units to ship in F15, about 10% of the eligible base, and 40mn in F16. The Watch is not to be dismissed financially as it represents about one-third of our forecasted revenue and gross profit increase in F15.

Valuation:
Stock breaking out Our $115 price target is based on a F15e P/E multiple of 15x or 12x when excluding $27 cash per share, roughly in line with market multiple. While iOS is a multi-sided platform that monetizes primarily through devices, the power of the "megaecosystem" with influence in many aspects of consumer lives is becoming clearer.