Apple's App Store growth appears to have slowed in 2019, a potentially negative sign for the company's focus on growing its services business to offset weaker iPhone sales.
But even though the Apple story has been tied to services for the last couple of years, a lot of the attention has actually shifted to the company's wearables business, which includes AirPods, Apple Watch and the lineup of Beats headphones.
AirPods have absorbed most of the attention. Apple introduced two new versions of AirPods in 2019: an update to the "regular" model that has better battery life and an optional wireless charging case, and the Pro model that features a new design and noise cancellation.
Besides the iPhone, AirPods appear to be Apple's smash hit of the holiday shopping season. AirPods Pro, which went on sale in October 2019, still have a month-long wait if you order them from Apple's website, although you might get lucky finding a pair at an Apple retail store. And don't count out the Apple Watch either. The Apple Watch lineup is also more attractive than ever, with 2017's Series 3 model starting at $199.
"We believe consensus is under appreciating the Apple Watch and Apple AirPods demand strength and Apple's wearables segment is likely to surpass $10 billion of quarterly sales this quarter," Citi analysts wrote in a research note on Dec. 23. "Yes we agree with consensus that generally believes Apple's services will continue to grow and help margins, but we believe consensus is overlooking the wearable's segment."
It's that optimism around Apple's wearables that has helped push the stock to new all-time highs in the new year. Apple broke past $300 per share for the first time last week, and many analysts are bullishly raising their price targets on the stock.
Assuming Citi's $10 billion estimate for the holiday quarter is close to correct, Apple could report about $27 billion in wearables and accessory sales for the full calendar year of 2019. (We'll get the exact answer when Apple reports earnings on Jan. 28.) To put that in perspective, that's nearly seven times the $4 billion or so Twitter expects to report for the same time period.
Apple's wearables strategy is also very similar to what it has touted for services. Even though iPhone sales aren't growing anymore, there are still about 1 billion iPhones in use around the world today. That's a billion opportunities to squeeze more money out of each user by selling them a useful accessory tied to the iPhone they already have. There's still plenty of room for Apple's wearables business to grow.
That strategy only works if Apple's accessories are good enough to justify spending $159 (the starting price for AirPods) or more on top of a $1,000 iPhone. And Apple nailed it with AirPods. I've been using the AirPods Pro for the last few weeks, and they're a noticeable and significant upgrade over the first model I had. The noise cancellation is excellent, the battery lasts more than long enough for what I need and they fit in my ears better than the regular model. I'd recommend them to anyone who can afford them.
Apple has rightfully earned a reputation for building excellent hardware products, and for falling short when it comes to software and other services. Apple's latest batch of subscription services — Apple News+, Apple TV+ and Apple Arcade — all had relatively lukewarm launches compared with the gadgets that came out during the same period. (Apple News+ in particular is struggling to gain paying subscribers, as CNBC reported last year.)
But AirPods and the Apple Watch are huge successes for the company, and offer a better lock-in to Apple's ecosystem than any of the company's digital services. You can't walk down the street without seeing them in use, even if they still look kind of goofy dangling out of your ears. And while you can technically use AirPods with an Android phone, the best experience is on the iPhone, increasing the chances that people will continue to upgrade to a new iPhone when they're ready for one.
If Apple's services were the key theme for the company throughout 2018 and 2019, expect wearables to suck up more of the conversation this year if Apple knocks expectations out of the park in its next earnings report.