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This Will Be Apple's Biggest Growth Driver (Hint: It's Not the iPhone)

By Danny Vena - Nov 22, 2019 at 11:30AM

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Worldwide smartphone sales are slowing, but Apple has other, less-saturated markets to tap.

The past year has been a challenging one for Apple ( AAPL 3.55% ), as sales of its flagship iPhone have slumped. The company posted revenue declines of 15%, 17%, 12%, and 9% in the four fiscal quarters of 2019, and iPhone sales have yet to return to growth. Economic weakness in China and incremental technological innovations didn't help matters for the company, but one of the biggest factors is a slowdown in global smartphone sales overall.

Worldwide smartphone shipments fell by more than 4% in 2018, and they're forecast to decline by another 2.2% this year, according to market intelligence company IDC, though the analysts see reason for hope that sales could return to growth in 2020. 

Fortunately for Apple investors, one of the company's growth segments looks poised to take up the slack from the iPhone for years to come.

The face of an Apple Watch 5.

Image source: Apple.

"Wear" is the growth coming from?

As you probably already know, Apple's wearables category has been generating explosive growth. In its fiscal fourth quarter (which ended Sept. 28), Apple CEO Tim Cook said wearables -- which includes AirPods, the Apple Watch, and Beats products -- had a record quarter "in each and every market we track" and generated "well over 50% growth." 

The expansion of sales in the category is expected to continue and could represent a $60 billion business for Apple, contributing $2 per share to earnings by fiscal 2023, according to Evercore ISI analyst Amit Daryanani. 

In a note to clients on Monday, Daryanani estimated that the segment will maintain a compound annual growth rate of more than 20% over the next several years, accelerating Apple's growth "even if iPhone sales remain flat."

There's evidence to support his enthusiasm. The wearable band market in North America -- driven by a boom in smartwatches -- hit $2 billion in the second quarter, according to market researcher Canalys. Apple Watch took the top spot with a nearly 38% market share, while growth surged 32% year over year. 

More to come

Daryanani estimates that there only about 75 million Apple Watches and 50 million AirPods are currently in use -- and that's less than 10% of the installed base of about 1 billion iPhones. This represents a significant growth opportunity as more "iPhone owners become buyers of AirPods and Apple Watch." 

Apple Watch accounted for as much as 52% of wearable sales during the fiscal year, with AirPods representing another 26%, but Daryanani believes AirPods will be the star performer going forward. The release of the AirPods Pro could further intensify the already-robust demand.

Don't take his word for it. A recent survey by Piper Jaffray found that Apple is the "top-listed consumer brand for teens" and AirPods are the most desired product on their holiday wish lists. 

A pair of Apple's AirPods Pro.

Image source: Apple.

Big shoes to fill

Despite the iPhone's revenue declines, the device is still a monster seller, producing more than $142 billion in sales in fiscal 2019 --  nearly 55% of Apple's revenue. No other single product or service will equal the earnings power of the tech giant's flagship device anytime soon -- but they don't have to. Sales of many of its other products and services are growing fast, and in the aggregate, they'll soon overtake the revenue generated by the iPhone, taking some of the pressure off of Apple's biggest seller.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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