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Tuesday, February 04, 2014, 07:09 am PT (10:09 am ET)

Morgan Stanley sees 'iWatch' ringing up $17.5B from iPhone users in first year

Apple's entry into the wearables market with a so-called "iWatch" could be an extremely profitable move for the company, with one investment bank predicting that the device will add up to $17.5 billion to Apple's coffers in its first year of sales.

iWatch

iWatch concept by Todd Hamilton


The estimate came in a Tuesday morning research note to investors from analyst Katy Huberty of Morgan Stanley. Huberty believes first-year sales of the wrist-worn device would outstrip even the iPad's impressive $12 billion debut.

Central to Huberty's thesis is Apple's positioning of the iWatch as a natural accessory to tens of millions of existing iOS devices rather than as a fledgeling product category like the iPod and iPhone were when they were first introduced. This would open the market to existing owners of the iPhone and iPad, she argues, as well as first-time Apple mobile device buyers.

Huberty's $17.5 billion first-year figure assumes an average selling price of $299 and no supply chain constraints. If supplies of the device were constricted, she believes revenues would fall to a still-imposing $10 billion to $14 billion.

Though Apple has yet to announce the so-called iWatch, many Apple watchers — including Huberty — believe that Apple's continued investments in infrastructure and research and development foretell the company's entrance into the market. The company posted 30 percent year-over-year increases in research and development spending from 2010 to 2013, and capital expenditures are poised to rise significantly.

Apple's "guidance for $10.45B of capital expenditures (non-cash and excluding retail stores) for FY14, which Apple just reaffirmed in the latest 10-Q, is up 32% from $7.9B in FY13. We believe this is an indication that Apple is investing in new product categories as single-digit iPhone and iPad growth no longer demands significant increases in capital expenditures," Huberty wrote.

Apple is believed to have a team of more than 100 working on the iWatch, which is expected to contain advanced biometric capabilities. The company has added a slew of fashion and medical industry veterans in recent months — including former YSL CEO Paul Deneve, Nike design director Ben Shaffer, and medical devices veteran Michael O'Reilly — who are thought to be focused on the device.