Apple's SmartWatch Launch Spells Doom for Watchmakers

Confirming earlier rumors, Apple Inc. AAPL finally unveiled its much-anticipated “Watch” on Sep 9. However, the news did not bode well for watchmakers Movado Group MOV and Fossil Group FOSL, whose share price declined 1.9% and 2.1%, respectively.

Year-to-date, Movado and Fossil have declined approximately 17.7% and 13.1%, respectively, compared with Apple's 24% jump in share price. The iPhone maker is expected to ship Watch in early 2015. We expect a glitch-less debut for Watch, which will further drag down share price of these watchmakers.

The wearable market is getting spicier with major tech players like Samsung, Motorola, Sony and LG Electronics showing significant interest in developing new gadgets. Fossil and Intel Corp. INTC are also collaborating to develop wearable technology.

To date, many of these companies have launched smartwatches with multiple designs. Some of them have been successful enough in building a niche customer base. However, we believe that Apple's entrance into the market will help the wearable technology go mainstream and eventually expand in the long run.

Per market research firm IDC, 2014 worldwide shipments of wearable computing devices will increase threefold to 19 million units from the 2013 level. This is expected to further grow to 112 million in 2018.

The Wall Street Journal recently quoted a study from Accenture's Acquity Group that expects the smartwatch market to grow fast. The report published in August expects one out of four U.S. customers to purchase a device over the next five years.

As compared to other smartwatch makers, Apple's loyal customer base is a huge advantage. The company hired executives from Tag Heuer, Burberry and Yves Saint Laurent who developed the sleek look of the device. We believe that Apple Watch's aesthetic and fashionable look will attract customers who have long left the habit of wearing watches.

Apple is offering three customizable editions of the Watch, a feature that none of the other smartwatch maker's currently offer. Apple Watch supports Apple Pay, the new NFC-based payment system Apple unveiled the same day. The Watch works with Siri, Apple's voice-controlled program.

Apple Watch also doubles up as a fitness device, which tracks heartbeats, counts calories burned and acts as an activity meter. This feature puts Apple Watch on the same lines of Fitbit Force, Jawbone Up, Garmin Vivofit and Nike FuelBand.

Although Apple Watch's features are novel, we believe that the company's decision to limit its compatibility only with iPhone may hurt growth prospects. Pricing will also be worth considering. Apple Watch starts at $349, which is premium compared to some other smartwatches.

The battery life of the device is not known yet, which is a concern. Apple did not offer the much-anticipated wireless charging option. Instead, users can charge Apple Watch by inductive charging system. We believe that battery life is an area where Apple may lag other smartwatch makers like Sony in the near term.

Additionally, the three-month gap between launch and shipment of Watch is quite discomforting as Apple will lose the holiday season, which will hurt top-line growth. We also remain cautious on Apple's supply chain.

Despite these drawbacks, we believe that Apple Watch is quite promising for Apple's growth prospect over the long term.

Apple has a Zacks Rank #3 (Hold).