Amit Daryanani: What Apple Watch Ultra does to the smartwatch market

"We estimate the premium Smartwatch opportunity for Apple ranges between $10 bn to $38 bn."

From "Watch Out!" a note to Evercore clients that landed on my desktop Friday:

Investor focus remains as always on the iPhone at this time of the year; however, for a year in which investor expectations are ranging from revenue declines in the bear case to modest growth in the bull case, every driver of growth matters. In that respect, we are taking a look at both the near-term and long-term growth opportunity from the recent move from Apple to enter the premium Smartwatch category; although, with significant room for further premiumization from hereon.

The growth in the Smartwatch segment has exceeded a +50% CAGR in terms of units and +60% in terms of revenue, with Apple managing to establish itself as a leader both in revenue and unit share despite a narrow and generic positioning relative to competition. However, the Ultra marks Apple’s entry into the market for performance watches for Sports (led by its positioning for Extreme Sports) as well as entry into the premium Smartwatch market.

We estimate the premium Smartwatch opportunity for Apple ranges between $10 bn to $38 bn, with the low-end of the range encompassing the upgrade of consumers focused on Sports, while the high-end of the range encompasses all consumers focused on basic features, like better battery life.

Furthermore, we see a roadmap for Apple to launch more premium watches to extend the portfolio, which although less likely to materially impact the revenue TAM on account of lower volume implications, will materially impact the margin opportunity for the company.

Maintains Overweight rating and $200 price target.

My take: Just to be clear, Daryanani isn't saying the Ultra alone will generate $10 to $38 billion a year. I think what he's saying the Ultra model is giving Apple a new entry to a $10 billion sports watch market and the $38 billion market for people willing to spend whatever it takes to get a smartwatch with better features, starting with longer battery life.

Meanwhile, two useful bar charts and two tasty pies...

apple watch ultra evercore

apple watch ultra evercore

apple watch ultra evercore

apple watch ultra evercore

22 Comments

  1. Fred Stein said:
    The Ultra adds to Apple’s EPS CAGR and overall stickiness.

    No surprise, that Amit has a higher PT than most other analysts who don’t see it. Apple’s 61% revenue CAGR in SmartWatches stems from continual innovation, which applies to all products and services. Powerful juju.

    5
    October 21, 2022
  2. Jerry Doyle said:
    @Neal Guttenberg: I also am considering seriously a purchase of the new and innovative Ultra. I will travel to Dallas next month and plan to test drive it while visiting an Apple store. I suspect that we will see next year more emphasis on upgrade for the Series 9 Watch since we did not see much of an upgrade for the Series 8 this year. I assume Apple placed its emphasis this year in bringing forth the Ultra, which will see likely next year an incremental update at best.

    On the charging issue Neal, for overnight sleep monitoring; I use my Watch for sleep monitoring and find that it only takes about 20-30 minutes charging to reach “full charge” after a day’s use. I usually do the charge anytime that I plan to sit at a desk to work, read, eat, watch a program or shower since I am not taking steps during these periods. It works just fine. You may want to try that regimen. No matter, Joseph B has the best of the world’s with his new Ultra adjustment set-up.

    Lastly, I truly believe the new and innovative Ultra is going to give a very nice bump in revenues and profits to Apple’s accessories category.

    5
    October 21, 2022
    • Bart Yee said:
      @Jerry @Neal
      I second casual charging for 20-30 min. I bought one extra Apple Watch MagSafe charging cord for use downstairs. If I notice I’m below 40% or lower. I can charge while eating dinner, or watching videos. Otherwise, plug / charge while cleaning up / winding down before bed. 30-40 min from even 10% low power warning goes to full but I also use Anker Power IQ 20W / port chargers for my iPhones, iPads and Watches. They work great and are very reliable.

      Then I can use for sleep tracking or just leave on charger so topped off and ready to go in the morning.

      0
      October 21, 2022
    • Neal Guttenberg said:
      Jerry,

      Thanks. Old habits about charging my Apple Watch are hard to change.

      I agree that the Apple Watch with the introduction of the Ultra will be a nice way for Apple to increase its revenues but that is only one part of the equation for me. I also see it as a way to help entice people into the Apple ecosystem. I wonder how many new the the iPhone these days switch from Android in order to be able to use an Apple Watch. There does seem to be ways for Android users to have an Apple Watch but it seems to be a bit of a hack job to be able to do it.

      0
      October 21, 2022
  3. David Drinkwater said:
    Two things stand out for me in the graphs:
    1) It’s Apple’s 61% share of the smartwatch share by revenue that impresses me most.
    2) It seems almost silly to take the trend back to 2014, since the Apple Watch was introduced in 2015. (Wikipedia /wiki/Apple_Watch, for reference). Knock-on observations:
    a) There were essentially no smart watch sales in 2014
    b) Starting the Historical review in 2015 therefor makes more sense, but that would also slightly decrease the CAGR, which might not be as exciting as the message that Daryanani wishes to send.

    Still, 61% share of the smartwatch share by revenue … 🙂

    2
    October 21, 2022
  4. Bart Yee said:
    The real game changer will be if Apple decides to address two specific Apple Watch complaints:

    1) extend battery life to greater than 1 full day or at least match Apple Watch Ultra life with regular Watch. Even lower power displays, lower power S-series processors, sensors, and electronics, optimized power usage, larger batteries or all of the above.

    And the one that will freak everyone out:

    2) Introduce two, maybe three (one Ultra version) sizes of an Apple Round Watch, with 3-4 nice finishes and possibly a truly distinctive functional bezel. Make sure at least the largest size looks very traditionally masculine.

    This would blow peoples’ minds and, I guarantee, at least 50% more unit sales.

    1
    October 21, 2022
    • Jerry Doyle said:
      @Bart Yee: Interestingly, no one has talked about the Watch’s band accessory.

      There is a sizable group of folk out there who collect or who have multiple colored Watch bands. I counted the other night after receiving my latest new band colors and I now am the proud owner of 100 Apple colored Watch bands (all different colors).

      I have spent more money on Watch bands than I have spent on Apple Watches. I have owned three Apple Watches: the Original Apple Stainless Steel, Apple Stainless Steel Series 4 and my current Apple Stainless Steel Series 6. I may be buying the new Ultra.

      In summary I have spent approximately $2,250 on Apple Watches, but $5,000 on Apple Watch bands.

      I write the above because Apple knows what I know and told you above. Some folk spend more in total on Watch bands than on their Watches. So brother Bart Yee, if and when Apple goes to a “Round Watch” casing, then those folk with many bands collected over the years will be watching closely to see if we still can use our bands. I suspect at some point Apple will need to transition to different size bands, but hopefully it want be during my life-time after collecting my 100 bands and more to come. 🙂

      5
      October 21, 2022
      • Steven Philips said:
        If at some point Apple needs to transition to a different sized band…
        they’ll happily sell you a dongle! 🙂

        1
        October 22, 2022
      • David Drinkwater said:
        Hi Jerry. I don’t see your watch band conundrum as a real risk.

        If you look at traditional round-faced mechanical watches, the band connection point are still always straight. I don’t see why that would change for a round-faced Apple Watch.

        If Apple Watches continue to get bigger, eventually the current band might not look right, but that’s a different aesthetic problem for you to manage!

        1
        October 22, 2022
    • Round watches that I see people wearing have square displays imbedded in them. It starts to seem like wasted real estate. I still wear one of Dad’s super thin Seiko’s but reaching deep into boxes full of 65,000 bees presents challenges.Squish one and the whole lot gets furious. (True for humans too).
      I do pass on the Apple Watches I’ve been gifted.
      My nurse said she only takes hers off to bathe. That image was soothing while I lay there helpless on a morphine drip.

      1
      October 22, 2022
        • Bart Yee said:
          His bionic shoulder replacement, post-op. Interesting to see coherent posts while he’s on it. Probably feeling rather mellow.

          1
          October 22, 2022
        • I’m off the morphine, I know addicts always say that, but I really am. I underwent a 3 1/2 surgical total replacement of my left shoulder. I granted 2 of my University of Pennsylvania orthopedist’s students permission to watch the procedure, iPhones in hand. My bees were probably all lined up at the skylight watching anxiously.

          2
          October 23, 2022
  5. Daniel Epstein said:
    Just took a look at Worldwide Watch Revenues to get an idea how big the overall Watch market is. Here is what I found.
    “Revenue in the Watches segment amounts to US$66.07bn in 2022. The market is expected to grow annually by 6.90% (CAGR 2022-2026).
    In global comparison, most revenue is generated in China (US$15,770.00m in 2022).”
    Let’s see how Apple is looking to grow in the category. If estimates are correct of Apple Watch Revenue of 14 Billion (using the higher number I saw) then there is a potential for a huge amount of growth available if Apple can tap into it.

    3
    October 21, 2022
  6. Aaron Belich said:
    On the latest release of Accidental Tech Podcast, Marco Arment noted that he’s already seeing 5% of Apple Watch users who use Overcast (his podcasting app), are using Apple Watch Ultra.

    Additionally, 20% of Overcast users have the Apple Watch app installed if I heard correctly.

    3
    October 21, 2022
  7. Greg Lippert said:
    My ULTRA battery allows me to sleep track and the fast charging gets me to full charge fast when I don’t really need the watch. Mission accomplished.

    1
    October 22, 2022

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