Apple (AAPL) Could Sell 85 Million AirPods in 2020, Representing 110% Growth - Analyst

Bernstein analyst Toni Sacconaghi is not a huge bull on Apple's (NASDAQ: AAPL) stock but he is bullish on the outlook for Apple’s AirPods, at least for next year. He thinks 2020 could be a “REALLY big” growth year for the wearable device.

While Apple doesn’t provide specific details on AirPods, the analyst’s own analysis suggested Apple sold roughly 40 million AirPods in fiscal 2019, its third year of existence, or about 60% more than the approximate 25 million units sold in fiscal 2018. He estimates the device will generate 2019 revenue of approximately $6 billion, or nearly double last year’s rate. He thinks next year's growth will be larger in terms of revenue and unit sales.

To get to his 2020 estimates, Sacconaghi looked at the total addressable market (TAM) for AiPods, noting “unit sales will invariably be capped by the size of the iPhone installed base.” He believe AirPods possess two structural advantages versus comparable wireless headphones: (1) brand loyalty among Apple customers, magnified by the AirPods' distinctive styling; and (2) the hardware-software integration of iOS with AirPods.

Looking further at TAM, Sacconaghi said the real question is whether the AirPods' addressable market encompasses (A) all ~900M iPhones in the installed base today, (B) just the ~650M first-hand iPhones in the installed base, or (C) an even smaller subset such as only iPhones with paid music subscriptions. The analyst considers (A) the bull case, (B) the base case, and (C) the bear case.

In the base case, the analyst forecasts sales of 85 million AirPods in 2020, generating approximately $15 billion in revenue. This is a 150% revenue increase from 2019 and will contribute about 350 bps to the company's total revenue growth. Unit growth under the base case would be 110%.

The firm’s analysis reveals two important takeaways: (1) Consensus estimates for AirPods in FY 20 may be $4 to $8B too low; and (2) given the AirPods' extraordinarily steep adoption curve and rapid saturation of the iPhone installed base, we see a dramatic deceleration in AirPods revenue growth by 2021 or 22, to single digit growth rates or possibly lower.

Commenting on the stock, Sacconaghi said while they are wary about Apple's significant multiple expansion over the last year, they believe that the stock could continue to grind higher in the near to medium term, given potential revenue upside this year (FY 20) due to AirPods, investor anticipation of a strong 5G cycle in FY 21, continued progress in services, and Apple's unrelenting share repurchases.

Despite the bullish AirPod projections, the analyst did change his Market Perform rating or $250 price target on Apple.

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