Apple (NASDAQ:AAPL) will report its holiday quarter figures on Jan. 28. Investors will be looking for strong holiday sales figures and management's guidance on the outlook for the next quarter. The new year will bring with it new challenges, but expectations for sales and earnings are high after Apple gained 86% in 2019, making it one of the best performing tech stocks of the year.

Apple's Q4 results, reported Oct. 30, met or exceeded investors' expectations in nearly every metric. Apple's stock price gain in 2019 was mostly because of its growth in its services segment and better-than-expected iPhone sales. Here's why its wearables segment will be the one to lead its stock price higher in 2020.

woman walking wearing airpods and holding iphone


AirPods and the Apple Watch were two of the hottest products during the holiday season

Wireless headphones were a hot item during Black Friday, with Target reporting that it sold five times more this year compared to last. The AirPods Pro version remained sold out for much of the week before and after Christmas, allowing some resellers to sell the headphones at an extra $100 above retail price. The two data points suggest that when Apple next reports its results, its wireless headphones will give a boost to its overall sales.

Demand for the AirPods Pro continues to outpace supply even after Apple asked its suppliers to double production from 1 million to 2 million units per month. If you want to purchase AirPods Pro from Apple's website, the wait time is over one month. Similarly, the wireless noise-canceling headphones are temporarily out of stock on other major e-commerce platforms.

Citi Analyst Jim Suva is bullish on Apple partly because he thinks holiday sales of AirPods and the Apple Watch is going to be so strong it will surprise investors. He's specifically excited about the Apple Watch Series 3, which could be found for as low as $129 during the holidays.

Apple Watch Series 5

Image source: Apple, Inc.

Apple's wearable products will be essential to its long-term success

Apple's wearables, home, and accessory segment is its fastest-growing, increasing at a 38% compound annual growth rate (CAGR) over the last two years. It grew from $12.8 billion in sales to $24.5 billion -- nearly 10% of 2019 total sales. In fiscal 2020, it is expected to become its third-largest segment, behind the iPhone and services. Not only is the wearables, home, and accessory segment the fastest-growing, but it is still accelerating, going from a 35.5% growth rate in 2018 to a 41% rate in 2019.

The Apple Watch is the key to the company's contribution in health services, and it's the Apple product with the highest ceiling of all. The Apple Watch monitors your heart rate and lets you know if something is wrong, and the ECG app, available on Series 4 and newer, can indicate whether your heart rhythm shows signs of atrial fibrillation.

As the watch evolves, its capabilities in health services will increase, providing an even more compelling reason to purchase. During Apple's Q4 conference call, CEO Time Cook said, "Apple's greatest contribution in the long-run is going to be to people's health."

The near-term outlook for the wearables market looks good

Apple is also in a strong position to capitalize on the wireless headphones category, which is forecast to have double-digit growth and give its customers yet another reason to stay in the Apple ecosystem. According to IDC, wireless headphones and ear-worn devices will experience a 41.3% compound annual growth rate worldwide between 2019-2023 from a base of 139 million units. Apple has a significant lead in this category with its wireless headphones at a 45% share of the market. The incredibly positive consumer response to the Pro version of AirPods means Apple will hold its substantial global market share, at least in the near future.

Although wireless headphones may be growing faster in percent terms, smartwatches will grow faster in absolute dollars. Smartwatches are forecast to grow at a CAGR worldwide of 16.4% through 2023 from a base of 69 million units, according to IDC. Smartwatches are another category where Apple has a significant global market share of 47.9%. What's more, price points on smartwatches are greater than wireless headphones and have more potential for price increases as the technological capabilities expand.

What this means for investors

The wearables segment will drive the stock higher in 2020 not only because of its near-term impact on sales and earnings, but more importantly, it will prove that Apple can still innovate and diversify away from the iPhone. The long-term potential for the wearables market is significant. Apple's early lead and commitments to the category signal to the market that it recognizes this potential and is taking steps to acquire a considerable market share.

Apple's incredible stock price gains of 2019 were driven in part by multiple expansion. What that means is that earnings stayed relatively flat while the price of the stock rose, increasing the P/E ratio. The increases drove its price into relatively expensive territory selling at 25 times, which is a 10-year high for Apple's P/E, its trailing twelve-month earnings. For the long-term investor, Apple is a good value even at this price, but you can always take your chances and wait for a dip in the share price to accumulate shares.

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.