Is the 'Watch' Apple's Zune moment?

Published Mon, Jan 12 20158:04 AM ESTUpdated Sat, Oct 14 201710:44 AM EDT

Nearly four months after the release of the first large-screen iPhones, 2015 sets up as an odd year for Apple with the Watch the only anticipated product launch in the pipeline. The stock usually sees giant speculative leaps before product launches, but analysts are skeptical about how much the Watch can boost Apple's share value. "If Watch doesn't blow people away, you're pretty much capped out," said Andy Hargreaves of Pacific Crest, which has a "sector perform" rating on the stock. Announced last September and expected to hit stores this year, the Watch is key for driving growth, as Apple's other strong plays are in the saturated tablet and smartphone markets, Hargreaves said. While he expects initial sales of the Watch to be strong, Hargreaves said the greater concern is whether people are still wearing the device months later. Analysts don't see much potential. In a blog post, Union Square Ventures partner Fred Wilson said that the Apple Watch "will not be the home run product that iPod, iPhone and iPad have been." "The market's not big enough," said NYU Stern Professor Aswath Damodaran. He specializes in valuations and doesn't see the Watch having a significant impact on the $660 billion company. Read More Apple Watch could boost stock: Analyst Even Jim Kelleher at Argus, which has a "buy" rating on Apple, states twice in a recent report that "we do not expect Apple Watch to be a major contributor in 2015, though it rarely pays to underestimate Apple." Other moves—from hiring Burberry 's Angela Ahrendts to featuring the Watch on the cover of Vogue in China—that Apple has taken to establish the Watch as a luxury fashion item could disappoint. "It's not going to matter at all unless it has enough utility" for millions of smartwatches, said Brian Blair of Rosenblatt Securities, noting that putting Google Glass on fashion show runways didn't help that product's sales. However, Blair is still bullish on Apple, forecasting a price 12 months from now of $130 to $140 a share, above the average FactSet target of $121.79 and up from Friday's price near $111. He attributes the Watch's delayed rollout to Apple's developing a higher level of technology than the firm had expected. "I don't think they're trying to hurry," he said. "They need to get it right." If Apple does get the smartwatch right, the iPhone maker has a huge advantage from its iOS ecosystem, analysts said. The system's app store is off to a strong start for 2015. Apple said that during the first week of January, customers spent nearly half a billion dollars on apps and in-app purchases, setting a weekly record. Read More Apple already hits new records in 2015 Developers are already creating apps for the Watch with the tools released last November, and the ability to tap into a standard operating system across all Apple's products is potentially powerful, said Alex Gauna of JMP Securities, which has a "buy" rating on Apple. Google's free and open Android system varies too much among different smartwatches and smartphones for consistent user experience, he said. App development is also the focus of Apple's latest partnership with IBM to create business apps for iOS, which Gauna said could help investors see the iPhone and iPad as corporate essentials, rather than consumer devices. NYU's Damodaran is not as enthusiastic about the IBM partnership but sees Apple as fairly valued with a dividend yield of about 2 percent. The stock's earnings multiple for calendar year 2016 is also slightly below that of Microsoft and Google . Still, the stock is far above its opening levels of $70 and without any strong growth driver, "it's not an incredible bargain," he said. For long-time investors in Apple, should they be worried about the recent developments? Ventures into enterprise and solid (but not exciting) products sound a lot like Microsoft. And if the Watch turns out to be a dud, the reputational fallout (see Microsoft Zune) for the stock would be much worse than any monetary disappointment. "I don't think people care especially since experience is better on the phone," Pacific Crest's Hargreaves said, adding that Apple is heading into the downside of the iPhone 6 cycle and that coming comparable same-store sales will have a tough time. To be sure, investors can't adequately judge a company that has built its brand on the mantra "people don't know what they want." Read More That time Apple hijacked CES, without being there "The door is still open for Apple to revolutionize the category (of smartwatches)," said JMP's Gauna. "The first devices for Apple aren't the most elegant," he said. But the first generation Watch "will lay the groundwork for a subsequent watch and the ecosystem."

Apple CEO Tim Cook announcing the Apple Watch.

Getty Images

"If Watch doesn't blow people away, you're pretty much capped out," said Andy Hargreaves of Pacific Crest, which has a "sector perform" rating on the stock.

Announced last September and expected to hit stores this year, the Watch is key for driving growth, as Apple's other strong plays are in the saturated tablet and smartphone markets, Hargreaves said.