Analyst explains why there is plenty of growth ahead for the AirPods

Apple's fastest-growing business unit is its Wearables, Home and Accessories segment. The products from this group include the Apple Watch and the AirPods. During the fiscal fourth quarter of 2019 (which ran from July through September), the division reported revenue of $6.52 billion, up a strong 54% year-over-year.

The Apple Watch is currently the most popular timepiece in the world. Note that we didn't say smartwatch. Even including traditional high and low-end watchmakers like Rolex and Casio respectively, the Apple Watch has beaten them all. And the AirPods are the leading Bluetooth wireless earbuds in the fast-growing in-ear or "earables" category. A report from analyst Kevin Rooke (via Digital Music News) says that Apple generates more money from the AirPods than the revenue reported by Spotify, Twitter, Snapchat, and Shopify combined. 

Rooke writes that last year, Apple sold 60 million AirPods units, a 71% hike from 2018's sales. But Apple also introduced the second-generation AirPods in March pricing them at $200 (a 33% price hike); later in the year the $250 AirPods Pro launched. So not only did Apple benefit from the huge increase in sales, it also added two higher pricing SKUs. Rooke estimates that if AirPods sales were divided evenly among the Gen 1, Gen 2 and Gen 3 units, the accessory generated $12 billion in revenue during the last calendar year. That works out to 4.5% of Apple's 2019 iPhone sales.

With smartphone and tablet sales sluggish (although Apple has recently seen a blip up in iPad revenue), the AirPods enjoyed triple-digit revenue growth both in 2018 (133%) and last year (128%). And as the analyst points out, the AirPods are only a small part of Apple's audio business which includes the Beats By Dre brand. Rooke says that there is still room for plenty of growth. The analyst notes that there are 900 million active iPhones globally and only 100+ million of AirPods have been sold in aggregate. That means the vast majority of iPhone users do not own a pair of AirPods leaving open the possibility for more growth to continue in the short-term.

And the AirPods story will get even more interesting if the rumor about Apple developing an operating system for the accessory turns out to be true. One thought is that Apple could create an audio-only social network around the product.

While everything looks promising in the near future for the AirPods, competition is getting fiercer. Besides the Samsung Galaxy Buds, Amazon and Microsoft have entered the arena and Google finally removed the umbilical cord that connected the left and right Pixel buds. And there are tons of AirPods knock offs that you can find in CVS, Walgreen's and Five Below.

Not everyone is as optimistic as Rooke. Author Neil Cybart challenges the method he used to come up with the $12 billion in revenue and frankly, we have to agree. First, let's examine the numbers. Back in November, a report cited anonymous sources who claimed that Apple was going to double AirPod shipments in 2019 to 60 million units. So let's say that this figure is accurate. The problem is how Rooke gets to the pricing. He estimates that Apple sold equal amounts of first-generation, second generation, and third generation AirPods. So that assumption works out to the following calculations:

The bottom line is the $12 billion estimated by Rooke. But we do need to consider that when the second generation model was introduced, it most likely took business away from the OG model. And the AirPods Pro was launched on October 30th which means that they were available for only two months in 2019. The analyst's computations are too simplistic. Cybert believes that Apple actually sold $7.5 billion worth of AirPods in 2019.

We might learn more on January 28th when Apple is expected to announce its fiscal first quarter 2020 earnings.