Source: Apple
It's an exciting time for Apple (AAPL -2.19%) fans. After reporting record earnings in its first fiscal quarter, the company has continued to reward investors, adding more than 10% to its gains even after investors digested the report. Adding to postearnings gains were unconfirmed rumors about a possible Apple car, perhaps autonomous, bringing Apple stock's tremendous run to 67% over the past year.
However, the biggest reason for Apple's gain appears to be continued and growing enthusiasm in regards to Apple's upcoming new product: the Apple Watch. Even most analysts are expecting huge unit sales figures in calendar year 2015, ranging from 41 million units in calendar year 2015 from Global Equities Research and former (incorrect) Apple bear Trip Chowdhry, to as low as 8 million from Piper Jaffray's Gene Munster. The question for investors is what if the bulls are wrong? What if Apple's watch is a total flop?
Behind the scenes accounts are disconcerting
A number of recent accounts point to continued issues with the product. First, a source told Apple Insider that the watch had production issues "at every stage of the development"; a Wall Street Journal article described the project's effects on resources as a "black hole." Of course, some of that is to be expected with an entirely new product, considering technology, design, and material issues. But if true, these rumors represent a departure from the flawless execution Apple fans are accustomed to.
To be fair to Apple, development issues don't necessarily mean the watch will become a flop, but rather point toward possible design and technology constraints that prevent the product from realizing its full conceptual functionality. And there have been reports that's what happened in regards to Apple's health features: The aforementioned WSJ article reports that Apple had more ambitious health-related plans including an electrocardiogram, a blood pressure monitor, and blood oxygen tracking, but these were abandoned because Apple couldn't get them to work.
Finally, a rumor out of Taiwan (by way of Business Insider) stated that Apple has cut initial shipments in half due to a screen issue, although it should be noted the site has been wrong before and Apple could easily be using another manufacturer as well. However, the rumor only adds to earlier accounts of production issues that could lead to a poorer user experience.
Even if it's a hit, initial sales could be deceiving
In the event Piper Jaffray's Gene Munster is correct, this could be a disappointing result for Apple based on prior precedent, considering Apple's recent new products have each sold faster than the one preceding it. As fellow Fool Sam Mattera points out, Apple uses 100 million units as a benchmark -- the iPod sold 100 million units in five and a half years; the iPhone sold 100 million in four years; and finally, the iPad sold 100 million in two and a half years. It may be hard for Apple to continue that trend with the Apple Watch.
And even if Apple Watch sales are initially strong, there's no guarantee the watch will be a long-term driver of revenue growth. As far as Apple is concerned, of the three aforementioned products, only the iPhone is still growing on a revenue and units sold basis, with the iPod being mostly cannibalized and the iPad running into a slower-than-expected upgrade cycle. It is entirely possible for the watch to face the iPad's sales diffusion.
Even if Apple's new smartwatch is a flop, however, long-term investors should take it in stride. In the end, the company continues to execute in its core line -- the iPhone -- and continues to innovate well there. While the watch probably won't become the next iPhone, it doesn't need to be for Apple to continue to perform well for shareholders.
