Imagine a startup with $12 billion of revenue, 125%+ YoY revenue growth (two years in a row), and Apple-esque gross margins (30-50%). Without knowing anything else about the business, what would you value it at? $50 billion? $100 billion? More?
That’s Apple’s AirPods business, the fastest-growing segment of the world’s most valuable company.
In 2016, when Apple released their first ever wireless earbuds called AirPods, many thought of them as an add-on product that could boost Apple’s average iPhone sales price.
The idea was that instead of selling every new phone with earphones included, Apple could sell improved earphones as a second product, without changing the price of the phone. Smart move for an incremental revenue boost, but the magnitude of AirPods success has surpassed all expectations. Now it looks like AirPods could become much more than just an iPhone accessory.
Since 2017, Apple has sold roughly 215 million iPhones per year. iPhone sales alone contribute roughly $150 billion of revenue for Apple each year. That's roughly 80% of Apple’s total product revenue.
And while investors have come to terms with the flat revenue for Apple’s iPhone business, it’s becoming apparent that Apple might have another big hit on their hands. AirPods sales have been beating expectations ever since Apple launched them in December of 2016.
Though Apple doesn’t share sales numbers for AirPods, industry analysts have converged on estimated sales numbers for each of the last 3 years. In 2017, Apple sold an estimated 15 million devices, each priced at roughly $150. That gave Apple a $2.25 billion revenue boost, only a 1.5% boost to Apple’s $150 billion iPhone revenue.
But in 2018, AirPods sales began to quiet Apple bears. 35 million pairs were sold, still priced at roughly $150. That gave Apple an additional $5.25 billion in revenue, then representing 3.5% of iPhone revenue.
And in 2019, Apple has pulled off yet another incredible year of AirPods sales. Apple sold an estimated 60 million units, but in 2019 the prices increased too. Apple’s second generation AirPods launched at $200, and their newest variation, the AirPods Pro sell for $250. Assuming an even split of sales between Gen 1, Gen 2, and AirPods Pro, Airpods revenue was $12 billion in 2019. That’s 8% of Apple’s iPhone revenue. Investors are paying attention now.
Because while 8% doesn’t sound impressive, it’s 8% of the world’s most successful product, which represents a majority of the revenue of the $1.3T behemoth that is Apple. And with Apple valued at 5x revenues, a similar multiple would imply the AirPods business is worth $60 billion.
Except AirPods sales are growing at triple digit rates each year. In 2018, AirPods revenue grew 133% over 2017, and in 2019 AirPods revenue was up another 128% over 2018.
This is what AirPods revenue looks like compared to some of the world’s top tech companies. AirPods make as much money as Spotify, Twitter, Snap, and Shopify *combined*.
And considering their triple-digit growth two years in a row, I would be shocked if AirPods didn’t earn more money than Uber in 2020.
And don’t forget. AirPods only represent a portion of Apple’s audio business. Apple also owns Beats By Dre, which is responsible for a healthy chunk of the world’s over-ear headphones market.
But as investors look forward to anticipate the future impact AirPods will have on Apple’s business, there are a few things to consider.
First, unit sales of AirPods have significant room to grow from here. Using the estimates linked above, 100+ million AirPods have been sold since they launched, while Apple’s installed base of iPhones is 900 million. That means almost all iPhone users are still either using wired earphones, third-party earphones, or none at all. Lots of opportunity to capture new users.
Second, the growth of unit sales is likely already priced in to the stock. It doesn't take a genius to do the math above and figure out that AirPods sales will continue growing from here. The real question that investors should be asking is "what could AirPods become that the world hasn't realized yet?"
This is where new AirPods features become important. Rumors are swirling that Apple may launch an operating system for AirPods in 2020, and apps like TTYL and Yac are already creating buzz as audio-first applications.
If Apple can successfully build an ecosystem of applications around AirPods and audio experiences, Apple will have more freedom to raise prices without lowering demand.
Audio experiences could also be a tool for growing Apple’s base of phone buyers. The differences between Apple’s iPhone and all other smartphones is shrinking every year. But new audio experiences could change that and re-ignite growth in Apple’s iPhone sales.
It’s the combination of higher prices and higher unit sales that the future success of AirPods depends on. New iPhone accessories alone won’t move the needle for Apple in the long run, but the creation of an entire audio ecosystem just might. Keep an eye on AirPods feature improvements, and the possibility of an Apple audio operating system in 2020.