As the Apple Watch and AirPods become meaningful growth drivers for Apple (AAPL) , a look at their penetration rates suggests the businesses still have a lot of room to grow.
In January, Apple reported that iPhones accounted for more than 900 million of the 1.4 billion-plus devices within its active installed base of iPhones, iPads, Macs, iPods, Apple TVs and Apple Watches currently in use. Given how closely both the Apple Watch and AirPods are integrated with iPhones, those 900 million-plus iPhones arguably serve as a proxy for their addressable market.
Naturally, not every iPhone user is going to be looking to buy a smartwatch and/or wireless earbud headphones in the coming years. But considering the delta that still exists between the size of Apple's iPhone base -- a base that has continued growing in recent quarters in spite of iPhone sales declines -- and the sizes of its Apple Watch and AirPods bases, there still seems to be a lot of room to grow Watch and AirPods sales.
Apple, which recently stopped breaking out its iPhone, iPad and Mac unit sales, has never broken out its Apple Watch and AirPods sales. However, research firm IDC estimates Apple shipped around 25 million Watches last year with the help of last fall's Apple Watch Series 4 launch, and research firm Canalys estimates 18 million Watches shipped the year before. Based on IDC's historical numbers, cumulative Watch sales -- including, of course, sales to consumers who have bought multiple Watch models over the years -- appear to have topped 50 million in Q3 2018, and might now be above 70 million.
Separately, Counterpoint Research estimates 35 million AirPods were shipped in 2018. For his part, long-time Apple analyst Ming-Chi Kuo has estimated AirPods shipments totaled 14 million to 16 million in 2017, and 26 million to 28 million in 2018. In April, Kuo forecast 2019 AirPods shipments, which will benefit from a March AirPods refresh, will total 52 million.
During Apple's July 30th earnings call, Tim Cook disclosed that Apple's "wearables" sales, which cover the Apple Watch, AirPods and Beats headphones, grew "well over 50%" annually during the company's June quarter. That helped Apple's Wearables, Home and Accessories segment, which also covers products such as Apple TV set-tops, iPods, HomePods and accessories, grow its revenue by 48% to $5.53 billion, or a little over 10% of Apple's total revenue.
While estimates for historical Watch and AirPods sales vary, both products appear to currently be used by less than 10% of Apple's iPhone installed base. After accounting for all the Watch and AirPods units that are no longer being used due to upgrades, or due to being lost or broken, both figures might still be comfortably below 10%.
Meanwhile, as Apple keeps rolling out new Watch and AirPods features, iPhone users who haven't yet purchased the devices will have more incentive to make the plunge. WatchOS 6, which rolls out this fall, introduces new health features, a Watch App Store and the ability to run Watch apps without a companion iPhone app. And on Monday, 9to5 Mac reported that Apple is working on a sleep-tracking feature for the Watch; the company's fifth-gen Watches will reportedly be unveiled at its Sept. 10 launch event.
The March AirPods refresh brought with it "Hey, Siri" functionality, along with connectivity improvements and an optional wireless charging case. Bloomberg has reported that Apple is working on third-gen AirPods that will support noise cancellation and water resistance.
It's quite possible that in time, Apple's "wearables" business will also include AR headsets and/or other products. But either way, the Watch and AirPods provide this business with a long growth runway. Simply getting Watch and AirPods penetration rates to, say, 20% to 25% of Apple's iPhone active installed base, would do a lot for the company's top line.
