Is This Apple’s Next $10 Billion Business?

Apple's Beats acquisition means big business--but just how big?

Aug 10, 2014 at 4:30PM

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...Now, let's get to work. Source: Apple

Since announcing the purchase of Beats Audio and Electronics, Apple (NASDAQ:AAPL) had been rather silent about its plans. But after finally gaining regulatory approval from the EU and the United States, Apple moved quickly to bring the brand to its website. And that's great for Apple investors, because the purchase of Beats will make accessories Apple's next $10 billion a year business.

Apple's accessories product line has mostly been considered an afterthought, an accounting convention to book sales of USB cables, EarPods, and wireless keyboards. But with overall top-line growth slowing over the last four fiscal quarters and a product segment rapidly approaching $6 billion, it appears Apple is taking accessories quite seriously. The chart below gives some context:

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Source: Apple 10-Q's. Right Y-Axis denotes year-over-year growth, the left Y-Axis is revenue. Figures in millions.

As you can see, the accessories segment over the past four quarters has provided a solid performance when compared to overall revenue growth. While Apple's overall growth over the trailing 12 month period clocked in at 5.1%, accessories alone turned in 5% growth by growing to nearly $6 billion.

$5.9 billion is a large number

At times Apple investors don't seem to understand how much revenue Apple brings in. And that makes sense, considering humans have problems understanding large numbers. For perspective, Apple reported $178 billion over the last four reporting periods -- or nearly half a billion dollars per day. As a matter of fact, Apple came in fifth in the Fortune 500 -- a list based on revenue.

But even more shocking is when you compare Apple's accessories segment to others on Forbes' list. Right now, if it was its own business, Apple's accessories division would be in the Fortune 500 itself. For perspective, coming in at $5.926 billion over the 12 months would put Apple's overlooked division at No. 432 -- tucked in between Lennar and Sanmina. The iconic motorcycle company, Harley-Davidson actually comes in two spots lower.

How Apple gets to $10 billion

The heavy lifting has been done merely by the purchase of Beats. While never confirmed by the private company, multiple third-party sources peg Beats Electronics' revenue at $1 billion to $1.5 billion last year. Using the midpoint of $1.25 billion, that puts Apple's newly combined accessories segment at nearly $7.25 billion, or three quarters of the way to $10 billion when including the Beats revenue.

And while the $1.25 billion addition isn't as large as Apple's current accessories business, it appears Beats Electronics is growing rapidly. Fast Company reports that Beats expected $350 million in revenue in 2011, providing growth of roughly 48% per year.

Finally, it appears the only other sub-$10 billion product line -- the iPod -- won't reverse its decline anytime soon. Perhaps it could reverse its awful trend if a newer iteration is released. With that being said, it appears that Apple is content to let the iPod fade away. Once an important product for the company, Apple hasn't released a new iteration in two years. But the purchase of Beats' high-quality headphones could provide moderate tailwinds to the music-based iPod.

Final thoughts

Over the last four quarters Apple has struggled with overall revenue growth, only reporting a 5.1% gain. To grow a top line now pushing $200 billion a year, it helps to have each product line firing on all cylinders. Apple's purchase of Beats is a game-changer for its accessories unit and should help it become Apple's next $10 billion business.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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