How Apple Watch Margins Will Impact Apple Earnings Going Forward

The Apple (AAPL) Watch isn’t as quick and responsive as a smartphone.

However, this issue will likely be addressed through software and hardware upgrades.

While the product category has a lot of promise, the Apple Watch has other costs pertaining to COGS and OpEx, which severely limits profit contribution over the next couple of years.

Volumes would need to be ramped up to offset these costs, which limits the contribution to Apple earnings. On the other hand, it may provide some upward lift to revenues in key quarters.

While I’m certain I’m on the exact margin impact, I don’t view the product category negatively, as I believe that over time it will add meaningful shareholder value.

Apple watch profitability analysis

From my own experience with the Apple Watch, I felt that the device was pretty slow in comparison to an iPhone but was substantially quicker than comparable smart watches from Samsung (SSNLF) and various other OEMs. Of course, I’m not much of a technology reviewer and I’m just basing this off of my own personal experience, but I think very many of you can already validate what I’m thinking here.

Apple plans to address this issue by releasing a second-generation Apple Watch that will come with improved hardware, and will operate without sharing data with an iPhone. More specifically, the Apple Watch is slow because it has to communicate with the iPhone to display information on the device, so by removing that bottleneck, the performance will improve considerably from the first generation device.

For the most part, investors had pretty high expectations for the upcoming product category. It takes a while for new product categories to appeal to the mass market. In this case, the app developer ecosystem is relatively small and it will take some time for developers to create a unique experience away from smartphones and tablets. Needless to say, the Apple Watch has very compelling applications for health and fitness, and is useful for big data analytics.