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Can This Fast-Growing Apple Segment Maintain Momentum?

By Daniel Sparks – Mar 20, 2018 at 5:05PM

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Revenue in Apple's smallest business segment is surging.

When Apple (AAPL -3.00%) investors look beyond the iPhone for the tech giant's growth potential, one often-cited opportunity is Apple's services segment. Driven primarily by rapid growth in the App Store, Apple Music, and Apple Pay, the business has morphed into Apple's second-largest after iPhone.

But there's another fast-growing Apple segment that has been growing even faster recently: other products. This includes revenue from Apple TV, Apple Watch, Beats products, the iPod Touch, and accessories. Though the segment is currently Apple's smallest, accounting for just 6% of trailing-12-month revenue, this likely won't be the case for long.

Apple's "other products" can contribute more strong growth to the tech giant's business in fiscal 2018 and beyond. Here are three reasons.

An iPhone X, Apple Watch, and AirPods charging on Apple's AirPower mat

Image source: Apple.

1. Growth is accelerating

One reason investors can count on more rapid growth from Apple's "other products" segment is that year-over-year revenue growth rates in the segment have accelerated sharply recently, highlighting the segment's strong momentum.

After adjusting the first-quarter year-over-year growth rate in "other products" to exclude the impact of an additional week in the year-ago quarter, segment revenue in the holiday quarter soared 47% year over year. This compares to 23% and 36% year-over-year growth in Apple's third and fourth fiscal quarters of 2017, respectively.

2. Apple Watch sales are surging

Since the Apple Watch launched in 2015, the device's popularity has been surging. Though Apple doesn't break out Apple Watch revenue specifically, the company has provided investors with some context on how rapidly the smartwatch's sales are increasing.

In Apple's first-quarter earnings call, CEO Tim Cook said Apple Watch revenue and units were up more than 50% for the fourth quarter in a row, with strong double-digit growth in every geographic segment. Furthermore, Cook said sales of the newest version -- the Apple Watch Series 3 -- were double the sales of Series 2 in the year-ago quarter.

3. AirPods are a blockbuster hit

Since launching in late 2016, Apple's wireless AirPods have been a huge success. Right out of the gate, demand significantly exceeded supply -- and this persisted well into 2017, with six-week shipping estimates for the headphones all the way through August.

A pair of AirPods lying on an iPhone

Image source: Apple.

Though Apple hasn't been as transparent about sales growth for AirPods as it has for the Apple Watch, rave customer reviews -- and Apple's obvious challenges with ramping up supply enough to meet demand -- make it obvious that the new product has been a meaningful catalyst for "other products."

In addition, management did say during the first-quarter earnings call that total revenue from wearable devices -- Apple Watch, AirPods, and Beats products -- increased 70% year over year in Q1, extending a trend of strong growth in Apple's wearable products in fiscal 2017.

Highlighting how strong a driver Apple's wearable products are for total revenue, Apple management said wearables revenue was its second-largest contributor to revenue growth after iPhone in Q1.

Apple's "other products" revenue accounted for 6.2% of revenue in the first quarter of fiscal 2018, up from 5.1% in the year-ago quarter. In light of this accelerating growth trend and strong tailwinds from Apple Watch and AirPods, the segment will likely continue growing as a percentage of Apple's total revenue.

Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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