Apple's Latest Hire Suggests A Future In Wearable Technology

By Will Ashworth | July 09, 2013 AAA

Apple (Nasdaq:AAPL) announced the hiring of former Yves Saint Laurent CEO Paul Deneve July 3. Why would a fashion executive leave the glamorous world of the runway for Silicon Valley? It turns out Deneve used to work in Apple's European business back in the 1990s. With analysts predicting wearable technology to be a $30 billion to $50 billion market within the next five years, Deneve's background clearly qualifies him to help bring some of this technology to consumers.

Will it be enough to help its stock? I'll have a look.

What's Happening in Wearables
It's funny to think of technology and fashion in the same sentence. However, Apple's iPod moved the discussion about technology products from being purely functional machines to items possessing a hip factor. You just had to have them. But even the iPod was really just a fancy headset. Whether we're talking about the iWatch, Google's (Nasdaq:GOOG) eyewear or Nike's (NYSE:NKE) FuelBand, wearable devices are quickly becoming part of our wardrobe. In five or ten year's, some of the devices that make it to market could be as common as smartphones today. Tim Cook stated in May: "It's ripe for us all getting excited about. I think there will be tons of companies playing in this…I think wearables is incredibly interesting. It could be a profound area." While it's not a sure thing, it's looking quite probable.

Credit Suisse (NYSE:CS) published a report in May suggesting the move to wearable technology is a "mega trend" affecting the economy in ways we can't possibly foresee. It argues that there are currently 250 million users with smartphones able to handle wearable technology. Of those, 15% will buy wearable devices like the iWatch. Currently, wearable technology generates actual revenues of $3 billion to $5 billion, primarily for use in the health and fitness industry. Amazingly, Credit Suisse's analysts predict that Apple alone will generate $10 billion annually from a product that is still on the drawing board. I find it hard to believe that Apple's going to make this kind of revenue from a non-existent product when it's having such a hard time getting its 60-inch TV to market. When the TV's on the market I'll take the prediction more seriously.

What Does It Mean For Apple Stock?
The Business Insider ran a story back in March that examined the potential profitability of Apple's iWatch. Author Jay Yarow reasoned that because the global watch market has gross margins that are high at 60% and Apple's iPod Nano had even higher gross margins around 70%; the iWatch if done well, could be far more profitable than its potential TV. There are just a few smart watch's currently available with the average sales price between $100 and $125. If Apple were to retail its version for $200, it would have to sell 50 million globally each year to meet the Credit Suisse projection.

Apple sold 125 million iPhones and 58 million iPad's in fiscal 2012. At a lower price point than either of its biggest sellers, it's certainly possible for it to sell 50 million units annually. If Apple were to make for $45, sell wholesale for $120 and retail for $200, its gross margin profit would be approximately $5.7 billion on 50 million units sold through its own retail shops and its wholesale partners. While it might not seem like a lot considering Apple's one of the biggest companies in the world, it equates to more than $6 per share or a 15% increase in its annual earnings.

SEE: Get Ready For The Wearable Technology Revolution

Bottom Line
Anyone who can't see the significance of Paul Deneve's hiring is clearly missing the point. It's not about the iWatch or the iTV or whatever else Apple's techies can invent, but rather the ability to sell consumers on the fact that they own cool products. Just as GM has convinced younger people that its cars aren't all made for old people, Apple needs to remind consumers that its products are still cool regardless of what Samsung might say or do.

Deneve understands the creative process and will be able to translate that onto the marketing page with great ease. Having worked at the company for a number of years, albeit many years ago now, the former CEO understands the culture of Apple. He'll be able to hit the ground running. As they say in finance, Deneve's hiring is accretive to earnings.

I believe the hiring is brilliant and will help its stock in a big way although not immediately. Be patient but this move should pay big dividends in 3-5 years.

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