The holy grail of Apple (NASDAQ:AAPL) Watch transforms the product into a medical device. The tech company has a promising new use for the watch, but the market has already accelerated entry company in the blood glucose monitoring market. My investment thesis remains ultra bearish on the stock until investors can buy the stock with upside potential from these new products, instead of the current scenario where Apples fall unless the company releases new blockbuster products.
Considering that Apple already has fall detection monitoring and ECG readings on the Apple Watch, the company working on a glucose monitoring device is not shocking. The big question is whether the tech giant is actually close to a surveillance tool capable of being included in the scale of the current Watch footprint to disrupt the diabetes market.
The Apple Watch already integrates these health functions into the apps:
- Temperature detection for women’s health.
- Advanced cycle tracking.
- Collision detection to help in an emergency.
- ECG tests for cardiac monitoring.
- Blood oxygen measurement.
Apparently Apple has been working on a blood sugar monitoring device dating back to the era of Steve Jobs. According Bloomberg, Apple was so secretive that it put the development under a different name so as not to alert outsiders to the work. The employees actually had badges under the corporate name of Avonte Health LLC and worked in an office a dozen miles from Apple’s headquarters.
While the market has started promoting a medical breakthrough in the device, the current report suggests that Apple is years away from having a device small enough to monitor blood sugar without pricking your fingers or implanting a device that needs to be replaced. Once the device scales up, the tech giant will need to verify that the product still works with patients and get FDA approval, which could be a lengthy process for a company new to the field. medical devices.
Apple is working on a measurement process called optical absorption spectroscopy. Essentially, the technology is able to measure blood sugar levels via a sensor and an algorithm, but the problem arises over the size of the device needed for the measurement.
According Bloomberg, the technology is now at the proof-of-concept stage suggesting the system works, but Apple still needs to scale it down to include it in the Watch form factor or other wearable device. The first system apparently sat atop a table, and the report’s suggestion is that the device be the size of an iPhone strapped to a bicep or leg.
Either way, Apple seems far, far away from including the technology in an existing device like the Watch. The Holy Grail is a scenario where the blood glucose monitoring system is part of an existing Apple product, not a brand new device.
The tech giant is already working on an AR/VR device that will be released later this year. Another expensive device does not seem ideal for diabetic patients. The CDC estimates that the United States currently has 34.2 million people diabetes for more than 10% of the population, while only 26.8 million people have been diagnosed.
DexCom (DXCM) And Abbott Laboratories (ABT) already have blood glucose monitoring systems on the market. DexCom is the independent player in the industry with just $3 billion in business for Apple to disrupt.
The company recently launched the DexCom G7 CGM System, after gaining FDA approval in December, as a wearable that sends real-time glucose readings to a compatible smart device or meter. According to DexCom, the G7 costs $89/month for Trade Assurance.
Either way, DexCom only generates $3 billion in annual revenue while competing with Abbott Labs’ Libre system. Whether the diabetes market is large or not, the independent blood glucose monitoring company does not generate holy grail-type revenues.
Apple will need to obtain FDA approval and constantly update the product in order to stay ahead of these companies focused on the CGM category of diabetes.
Opportunity to watch
Apple no longer reports Apple Watch units sold and sales are included in the general Wearables category. The category’s sales have skyrocketed over the years, but the category includes big AirPods sales as well as Apple TV and HomePod sales.
The Wearable category achieved FY22 sales of $41.1 billion with BusinessofApps estimating that the watch generated $12-14 billion in sales. The Watch product launched in 2015 with 8.3 million units sold and jumped to 46.1 million in 2021.
The question is what opportunity exists for Apple to garner watch sales in the large diabetes market. If the company only got one more watch sale, Apple would generate about $400 from diabetic customers every several years, and those customers might already be planning to buy a watch.
The company would likely charge a blood glucose monitoring fee, but the best-case scenario is a product that generates revenue similar to DexCom. Apple might generate both an additional Apple Watch sale and a monthly monitoring fee, but how the tech giant will likely generate more revenue on a blood glucose monitoring system can’t be discussed. which exceeds the amounts produced by DexCom.
If Apple brought the device to market in FY25, glucose monitoring revenue would completely replace DexCom and yet revenue would still fall short of 1% of sales. All of the incremental sales are certainly attractive to any business, regardless of size, but consensus estimates indicate that Apple should produce $442 billion in annual sales.
The stock trades at 25 times FY23 EPS estimates of nearly $6. Apple is expected to see earnings fall this fiscal year with no signs of double digit growth over the next 3-4 years.
The stock is already rated for success with hyped new products like a blood glucose monitoring system. Apple would need this new device or AR/VR product to successfully change earnings guidance where EPS growth exceeds 10% to justify the current stock valuation, let alone higher prices.
To take with
The main takeaway from investors is that the Apple Watch, as a true medical device, is a sacred opportunity. The blood glucose monitoring device has the potential for such an opportunity, but the tech giant’s threshold seems far from a working device and the short-term revenue potential is relatively low despite the scale of diabetes.
Investors shouldn’t buy Apple for an overhyped product. Furthermore, the stock price is already set for such a medical device to successfully trade at 25x FY23 estimates, while the ideal time to buy Apple is when a new product is a bonuses for shareholders.