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Apple's Next Big Thing: The iWatch?

By: Chris Ciaccia
Posted: 2/5/2014 10:05:00 AM
Referenced Stocks: AAPL;GOOG;MSFT

It's been almost four years since Apple (AAPL) released a new product; their last big launch was the iPad in 2010. With all the rumors and talk about Apple getting into new product areas, speculation surrounding the iWatch is heating up and it could be huge business for Apple.

Morgan Stanley analyst Katy Hubert, who rates Apple "overweight" with a $630 price target, believes that Apple is bumping up its research and development (R&D) spending for something big to come, most notably the iWatch. "We believe history is about to repeat itself," wrote Huberty, noting that Apple shares have outperformed over the next 12 months following a bump up in R&D spending. "Apple is stepping up R&D investments, even after a period of prolonged R&D growth. Management guided Mar Q R&D ahead of expectations, and [Apple] CEO Tim Cook confirmed that there will be new product categories from Apple in CY14 on the most recent earnings call."

Wearable technology is certainly a hot area, with companies such as Samsung (SSNLF) launching Galaxy Gear, its own smartwatch. Other companies, such as Google (GOOG), Microsoft (MSFT) and others are rumored to do the same. Cook may have hinted that wearable technology is something the company will pursue. “The wrist is interesting,” Cook told Kara Swisher and Walt Mossberg at a 2013 tech conference.

Though speculation has been that Apple's next product could be mobile payments, given Cook's comments on Apple's most recent earnings call, wearable tech seems more likely, according to Huberty. "Significant investment in communication and sensor technology including the acquisition of WiFiSlam, Passif Semiconductor, and PrimeSense in just the last year suggests Apple is looking to extend its platform to a wider array of devices," Huberty penned in the note. "As a result, we view the new product category CEO Tim Cook referenced on the F1Q14 earnings call as most likely a wearable product, like an iWatch."

During a recent iPhone event, Apple unveiled the A7 and M7 chips, with the M7 co-processor suitable for sensing motion. At the time, speculation immediately went towards the M7 eventually being used in the iWatch. Time will tell with this, but it's a good bet that the M7 will be used in future products, as Apple's products become more data-driven.

In addition, Cook said, "The mobile payments area in general is one that we’ve been intrigued with, and that was one of the thoughts behind Touch ID."

Despite all this, investor sentiment surrounding the iWatch is muted, at best. Not to worry, writes Huberty. "We see meaningful upside from the category as current consensus forecasts don't contemplate new revenue sources. Each historical Apple product category has ramped faster than the prior one due to Apple's growing customer base."