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.
“Assuming an even split of sales between Gen 1, Gen 2, and AirPods Pro” is a really faulty premise to base a lot of this analysis on. No denying they’re incredibly successful, though.
Rooke estimates that AirPods are a bigger business than all of Adobe, Nvidia, AMD, or Spotify.
Jeran Wittenstein, Bloomberg:
Credit the shift in sentiment to Apple’s focus on tapping an ecosystem of nearly 1.5 billion users to generate a steady stream of profit. The increasing contribution from services like iCloud storage and Apple Music is making its business more stable and therefore deserving of a higher multiple, according to Gene Munster, a long-time Apple analyst and founder of Loup Ventures.
“Investors are slowly getting more comfortable with the concept that a company that has a combination of software, hardware and services can be a dependable business,” Munster said.
Between the blockbuster sales of new products like the AirPods and Apple Watch, subscriptions to services new and old — plus the continued success of the rest of the lineup — it’s little wonder that Apple’s stock hit an all-time high last week.
Eric Savitz, Barron’s:
Apple’s mammoth 2019, which took the stock up 86% for the year and 50% in the second half alone, has created a conundrum for analysts with Buy ratings on the stock but target prices below the current level. While the stock is just shy of $300, the average target is $266. Analysts need to decide: turn more cautious or boost the target?
So far, the consensus move is to push out the goal post.
Now is as good a time as any to look back at nearly a decade of analyst commentary advising the replacement of Tim Cook as CEO. Any shareholder that sold their stake in Apple after those complaints would have kicked themselves silly across 2019.
Sounds great. But the wild gains in service subscriptions haven’t come out of nowhere.
But I worry that with its services push, Apple is turning into an advertising company too. It’s just advertising its own services. In iOS 13 they put an ad for AppleCare at the very top of Settings. They use push notifications to ask you to sign up for Apple Pay and Apple Card, and subscribe to Apple Music, TV, and Arcade. The free tier of Apple News is now a non-stop barrage of ads for Apple News+ subscriptions. Are we at the “hellscape” stage with Apple? No, not even close. But it’s a slippery slope. What made Apple Apple is this mindset: “Ship great products and the profits will follow” — not “Ship products that will generate great profits”.
With the AirPods and Apple Watch, Cook has proven himself to be a CEO that can define entire product categories by bringing visionary ideas to market. But Apple’s services business isn’t nearly as revolutionary. Lots of people are subscribed to Apple Music, but that’s probably partly because it’s a default option, and partly because there’s little profound differentiation in music streaming platforms. MacOS and iOS badger you to upgrade your iCloud storage when you’re running low. I’m sure a lot of people are Apple TV Plus subscribers, but that’s because a lot of people bought an Apple product in the past few months and got a free year.
I am not suggesting that Apple’s services are not successful, nor am I saying that Apple is misrepresenting them. But they’re pushing services hard in a way that I worried about after their March event. I’m not saying that services sell themselves; Apple clearly has to promote them somehow. It’s just that such a hard sell cheapens their hardware and operating systems. Users should want to subscribe to Apple News Plus because it is a good service — you know, hypothetically — not because it is irritating to use Apple News without it.
Update: Kevin Rooke’s analysis has a bunch of holes in it, as Neil Cybart points out. I regret linking to it. Even so, by Cybart’s estimates, Apple’s AirPods business generated closer to $7.5 billion in revenue in 2019.