Why Apple Needs To Keep On The Watch
With the ITC ruling on the US Apple Watch ban, we explain why investors need to follow this developing story.
News out over the past few days regarding one of Apple’s most popular products warrants our attention. Due to a patent dispute with Masimo Corp, the Apple Watch Series 9 and Ultra 2 will be pulled from sales online starting Thursday, ahead of the US ban date of Dec 25th.
Apple shares only fell 0.9% in Monday trading following the news, showing that whilst it is market-moving, traders don’t see the current situation as very damaging to the company. However, should the situation escalate or be drawn out for a longer period, we feel this could quickly become an issue for shareholders.
Key details of the story
Masimo Corp alleges that Apple stole their patented pulse oximetry tech, which measures blood oxygen levels. The International Trade Commission (ITC) ruled back in October that Apple had violated the patents and demanded that sales of the devices halt.
The feature has been in the watch since 2020.
A presidential review of the order is ongoing, but a veto is unlikely. Hence, Apple is removing the products from sale now, with a small chance that the review comes out in their favour before Christmas.
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Why Apple should be concerned
When the Q4 ‘23 earnings were released, we put together the below graphic showing the changing demand for Apple products over the past couple of years.
At the time, we focused on the strong demand for iPhone and Services, with Mac and iPad sales being problematic. Yet in the middle, there’s the Wearables division, which houses the Apple Watch.
Technically, the full name of the division is ‘Wearables, Home and Accessories,’ so the $9.3 billion in Q4 revenue isn’t solely the Apple Watch. However, analysts estimate that Watch sales contribute around 43% of the revenue from the division.
Given the total revenue for Q4 ‘23 was $89.4 billion and that Wearables made 10.4% of this, it follows that the Watch alone makes 4.5% of total Apple revenue. This isn’t a small number.
This is also damaging a product line that has been growing in size for the brand:
Of course, the ban is only applicable in the US at the moment, meaning that revenue from other parts of the world will be unaffected (for now). Yet we feel other companies will be watching carefully on this.
Barbarians at the gate
Given Apple’s size and financial firepower, they are constantly a target of lawsuits and potential patent infringements from smaller companies.
For example, think back to when Qualcomm won a preliminary injunction in China in December 2018, which led to a ban on the import and sale of several iPhone models (iPhone 6S through iPhone X) in the country.