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Wearables Are Moving the Needle for Apple

By Danny Vena – Updated Aug 19, 2019 at 5:09PM

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As demand for the flagship iPhone continues to stagnate, other products and services are picking up the slack.

It's no secret that Apple (AAPL -1.18%) has struggled with slowing iPhone growth in recent years, and the company isn't the only one dealing with this issue. Global smartphone shipments are expected to decline by 1.9% year over year in 2019, according to data compiled by market intelligence company IDC. This will mark the third consecutive year of contraction, as developed countries face market saturation, while slower churn in developing economies also places a drag on demand. 

As a result of slowing smartphone growth, Apple has turned its focus to other products to help pick up the slack, and the company has placed particular emphasis on services and wearables. That strategy is paying off, and while wearables still make up a relatively small segment for the iPhone maker, it's beginning to move the needle.

The Apple Watch Series 4 displaying a fiery looking face.

Image source: Apple.

Dominating the category

Data out late last week suggests the wearables market in North America hit $2 billion in the second quarter, with shipments increasing 38% year over year to 7.7 million units, according to a report by Canalys. 

Apple led the way in the smartwatch category, with more than 60% of the company's 4.7 million units being sold in the region. This helped Apple Watch grow by 32% year over year, shipping 2.9 million of the devices, accounting for nearly 37.9% of the market. For perspective, Fitbit (FIT) took the No. 2 spot, with 1.9 million shipments (24.1% share), though smartwatch sales declined year over year as the company shipped more lower-end products. 

It's important to note that Apple doesn't provide specific metrics related to its wearable sales, but in its fiscal third quarter (ending June 29), Apple CEO Tim Cook said the segment saw "accelerating growth." On the conference call, Cook said it was an "absolutely blowout quarter for wearables where we had accelerating growth of well over 50%." He went on to say the Apple Watch set a new third-quarter revenue record, and that 75% of Watch customers were buying the device for the first time.

Moving the needle

Don't take my word for it. UBS analyst Timothy Arcuri said that two of Apple's most popular wearables, the Apple Watch smartwatch and AirPods wireless earbuds, offer particularly intriguing possibilities. Arcuri believes that the combination of strong demand and low market penetration bode well for Apple's wearables category. 

The analyst pointed to developments that could potentially further accelerate adoption of the AirPods. First, Arcuri anticipates a more robust upgrade cycle in the works, "especially in what should be a bigger iPhone upgrade in 2020 due to 5G," Arcuri said. In addition, if Apple decides to go fully wireless with future versions of the iPhone, it would drive significant demand for the wireless earbuds.

Arcuri estimates that only 7% of iPhone users currently own AirPods, while just 12% own an Apple Watch. This leaves plenty of users that have yet to upgrade to the devices.

"Don't look now," Arcuri said, "but wearables are actually moving the needle" for Apple.

Danny Vena owns shares of Apple and has the following options: long January 2021 $190 calls on Apple and short January 2021 $195 calls on Apple. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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