With an $84 Cost to Build, Apple Making Huge Profits on Watch?

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There has been a lot of hype surrounding Apple Inc.’s (NASDAQ: AAPL) newest release, the Apple Watch. The big question has been how this tech giant expects to make money off of this. One word, margins. Maybe that should be incredibly high margins, to the point where some customers might feel like they are being bilked.

At the most inexpensive retail price, the 38mm Apple Watch Sport sells for $349, while it only costs a fraction of this price to produce the smartwatch, nearly a quarter. 24/7 Wall St. took into account a study conducted by IHS for a further breakdown of the costs.

According to a recent release by IHS, the new Apple Watch has the lowest ratio of hardware costs to retail price. The actual cost-to-price ratio is 24%.

The teardown of the Apple Watch Sport 38 mm by IHS Technology shows a bill of materials of $81.20 with the cost of production rising to $83.70 when the $2.50 manufacturing expense is added.

The most expensive part of the Apple Watch is the 1.34-inch LG touchscreen display, which comes in at $20.50. The least expensive component is the 3.8 volt battery pack, which costs less than $1. The manufacturing cost at $2.50 is the second smallest expense in production.

Note that the IHS Technology analysis does not include logistics, amortized capital expenses, overhead, SG&A, R&D, software, IP licensing and other variables throughout the supply chain, such as the EMS provider.

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Kevin Keller, senior principal analyst-materials and cost benchmarking services for IHS Technology, commented on the breakdown:

It is fairly typical for a first-generation product rollout to have a higher retail price versus hardware cost. While retail prices always tend to decrease over time, the ratio for the Apple Watch is lower than what we saw for the iPhone 6 Plus and other new Apple products, and could be of great benefit to Apple’s bottom line if sales match the interest the Apple Watch has generated.

Apple shares traded up fractionally at $126.13 Friday morning. The stock has a consensus analyst price target of $147.80 and a 52-week trading range of $82.90 to $134.54.