A watch could never do augmented reality overlays -- heck, even a phone can do those better than a watch ever could. IMO that's like saying the iPad will go head to head with laptops -- it's an apples-to-oranges comparison.
You're right: a watch != a HUD. However, in the current iteration, people would be using a watch for pretty much the same purpose as Glass (which can't really do full on augmented reality either) so, despite their differences, they would definitely be in direct competition with each other.
AIUI Glass can't do augmented reality only because the API is currently too restrictive, which is really too bad. Using a HUD as a glorified head-mounted camera seems like a huge waste of opportunity. Even if they never open up the API, a HUD can still do things that a watch is going to struggle to replicate.
This[1] is a good overview of what it takes to make an AR device, and it examines the Glass hardware in respect to that. The verdict? The hardware is there (although it's not stereoscopic) but the software is behind. You have to start somewhere, though.
