Apple (NASDAQ: AAPL) updated its hugely popular AirPods wireless earbuds product line earlier this year to include a number of interesting features, like a next-generation wireless connectivity chip and the addition of an optional wireless charging case. Although it might have seemed that this was it for Apple's AirPods releases for 2019, a fresh report out this week from respected analyst Ming-Chi Kuo with TF International Securities indicates that more might be on the way.
Let's take a closer look at what Kuo says Apple has in store for the product line for later this year and why investors should care.
Image source: Apple.
Not one, but two new AirPods
According to Kuo, Apple won't just launch one new pair of AirPods in 2019, but two. The first, he says, will be an "all-new form factor design at a higher price." The second will be a more price-sensitive version that looks similar to the current models, but will include an internal redesign that will mean better "assembly yield rates, saving internal space and reducing cost."
Yield rate refers to the percentage of product produced that actually reaches store shelves. The higher those yield rates, the better a company's gross margin on a product line is, all else being equal. Lower manufacturing costs should also help on the gross margin front, too.
Kuo is reportedly "positive on the demand for AirPods" and thinks that the higher-end model "could boost the replacement demand and attract new users." In other words, he thinks that an all-new design could get owners of current AirPods to upgrade while also getting people who were previously on the sidelines to finally jump in.
To that end, the analyst estimates that Apple will ship a total of 52 million AirPods in 2019 and between 75 million and 85 million units in 2020. For some perspective on the magnitude of those projected unit shipments, Kuo also expects the company to ship between 195 million and 200 million iPhone units in 2020. While AirPods carry substantially lower average selling prices than iPhones do, there's no denying that AirPods have truly been a runaway success for the company.
A smart segmentation strategy
There are two common ways to try to boost revenue for a given product line. The first is to drive unit shipment growth, and the second is to try to boost average selling prices by offering customers more value. In an ideal world, a company could experience both.
What Apple is reportedly planning to do here is smart. It's still set to produce the standard-priced models, but for customers that would find value in a new (presumably sleeker) design, Apple is planning a higher-priced product. Not every prospective AirPods buyer will go for the pricier model, but enough should that Apple should enjoy a material increase in AirPods' average selling prices.
That increase in average selling prices, in concert with the raw unit shipment growth that Kuo predicts, should help to accelerate the company's AirPods-related revenue growth rate.
Such average selling price growth can't go on forever, but given that today's AirPods sell for $159 ($199 with the wireless charging case), there's probably plenty of room to scale up over time. It wouldn't be surprising to see Apple, after segmenting the lineup into two grades of AirPods, add a third tier with still more advanced features and design in the coming years at an even higher price. There's certainly a price ceiling -- I'd imagine in the high $200s or low $300s range -- but Apple is still a ways off from bumping into it.
AirPods represent just one part (albeit a significant one) of the company's wearables, home, and accessories segment, which itself represented just 8.7% of the company's overall revenue last quarter. Significant growth in the AirPods product line isn't necessarily going to have a big impact on the company's overall financial performance in the near-term. But that growth will help the company enjoy an increasingly diversified revenue base over time -- something that could help bolster investor confidence in the business.
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Ashraf Eassa has no position in any of the stocks mentioned. 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.