Morningstar Analyst: Apple Needs Continuous Edge To Justify Premium Pricing

Although the new product from Apple Inc. (NASDAQ: AAPL), the Apple Watch, has attracted a lot of media attention, according to some analysts it will at best be a niche product in the portfolio of the company and won't contribute significantly to its earnings in the future.

Brian Colello, senior analyst at Morningstar, was on CNBC Wednesday to discuss why Apple Watch is not going to be as big as its being made out to be and the risks that Apple faces from competitors.

Primarily An iPhone Company

"When we think about this product long term, we think ultimately it may be five years down the road it gets to about 6 percent of the revenue," Colello said.

"Apple is still primarily an iPhone company and everything they do quite frankly centers around the iPhone. It allows Apple to sell more iPhones."

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He continued, "So, it will have a bit of an incremental revenue boost and earnings as well. It's probably relatively high margin compared to some other products, but I think the more important factor is that for any Apple Watch that it sells, it's very likely that they will continue to buy iPhones now and in the future.

"And I think that bodes well for the core part of the business."

Risk From Competitors

Colello was asked what kind of risks Apple faces from its competitors. He replied, "They face it from all angles and companies with different profit motivations. So a company like Amazon or Xiaomi in China, for example, are giving away hardware, selling it at close to cost in order to drive revenue from media, streaming, other sort of services.

"That's a very difficult proposition for Apple to compete against. They need to be – continually be – on the cutting edge, have more features than the rest of the competition in order to warrant that premium pricing," Colello concluded.