Wearables Still Positioned for Years of Rapid Growth

Wearables Still Positioned for Years of Rapid Growth

We’re updating our Apple Wearables, Home, and Accessories model. This category includes two signature products, Apple Watch and AirPods. While Apple does not report details on those segments, the company has made 27 guiding comments since Dec. 2014 related to trends in the category, typically in regards to growth rates and trailing revenue, which we use to guide our assumptions.

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  • Attempting to model coronavirus impact: In an attempt to model coronavirus’ impact on our 2020 wearables model, we’re reducing the category’s growth in CY20 from 45% to 35%. Our long-term view that the segment has significant room to grow is unchanged. While impossible to predict the actual impact, coronavirus will impact Apple in the June quarter and likely throughout the back half of the year through a combination of tight supply and soft demand. The demand impact is of course not limited to Apple, and will, unfortunately, affect almost every company, large and small alike.
  • Supply is fluid. The status of the supply of Apple products remains fluid. We caution that recent reports that Apple has restarted some of its production do not account for manufacturing capacity and the reality that, while China appears to be finding its footing in combating coronavirus (Friday’s Chinese government report that there were no new infections outside Wuhan) the world is not in the clear. This week we found a modest headwind to Apple’s supply of iPhones and AirPods.
  • We have increased confidence in our wearables model. Based on comments from Tim Cook at Apple’s annual shareholder meeting on Feb 26 that the wearables segment is now equal to Marriott or Visa revenue, we have higher confidence that our wearables model accurately illustrates the revenue trajectory.
  • Wearables now 8% of revenue. In CY19, we believe Wearables was 8% of revenue ($20.8B), up 53% y/y. This was an acceleration from CY18’s 5% of revenue growing at 48%.
  • Wearables bigger than Mac. We continue to expect wearables will account for 11% of revenue in CY20, slightly exceeding Mac revenue at 10% of next year’s total revenue.
  • AirPods. We expect CY20 AirPods unit growth of 50% with 90m units, down from our previous estimate of 60% growth with 95.8m units.
  • Apple Watch. We expect CY20 Watch unit growth of 20% with 34.1m units, down from our previous estimate of 30% growth with 36.8m units.

Beyond 2020, Watch Has Significant Room to Grow

Overall Watch adoption remains nascent, which we believe supports 20-30% unit growth for the next five years. We estimate, at the end of Dec-19, 9% of iPhone owners used a Watch (based on a 3-year expected life). Long-term, we believe the attach rate could reach 40%, which implies about 125m units a year (compared to our 34.1m estimate for CY20). This implies, in 2025, about 12% of Apple’s overall revenue will be from Watch (assumes $48B of $385B in overall revenue in 2025).