Apple in 2020

Apple is off to a strong 2020 and for a good reason. iPhone sales have stabilized, and the brief worry investors had that iPhone sale would continue to decline is over. Many of us fought this narrative, explaining the dip would not be as bad as imagined, and the bigger question was where annual iPhone sales would normalize. The answer to that question seems to be in the 180-200m range annually.

Smartphone sales are not growing. Globally they are roughly flat YoY. iPhone customer remains extremely loyal as Apple has the highest loyalty rates of all smartphone OEMs globally (Apple’s 83%, Samsung’s 72%, Huawei’s 60% and no other OEM above 45%). Not only are retention rates for Apple stable, but so has the lengthening upgrade cycle of handsets stabilized. A large body of research from multiple global smartphone studies I’ve read suggests we are settling into an average age of smartphone handset that should not lengthen much more. The slowing to declining growth of the smartphone market, largely due to lengthening refresh rates have both become stable.

Regarding Apple, those two things were the main concern for iPhone and the market seems to now be stable and showing signs it will remain that way for the foreseeable future. The last six months of market data seem to confirm growing confidence in Apple as a company (even though it should have been there all along given the fundamentals of the business).

For the sake of this analysis focus of looking at Apple in 2020, I’m going to do it two ways. The stock view and then the products where growth will come from view.

Stock Perspective
While I don’t do the whole financial model thing, I do read way too many buy-side notes from some of the notable large banks. Many of those notes I read are on Apple. Most analysts had Apple’s end of year price target in the $220-$230 range. If you follow Apple stock, you know it is now hovering in the $310-$315 range. So the question is, why is confidence rising?

It feels as though confidence in Apple stock is rising the same way it did right after the launch of the iPhone 6 and 6 Plus. A time when Apple was adapting its iPhone strategy to cater to larger bases of customers. Apple saw several stellar quarters, particularly in China, and sentiment around the stock was as strong as ever.

Interestingly, the stock stayed relatively solid until Apple’s first revenue warning in late 2018. Now, while the current uptick in Apple’s stock is a bit steeper than past ones, and there may be some correcting, I don’t think the stock will take a dramatic hit due to returned confidence in Apple’s fundamentals as a business and the upside in adjacent business growth areas.

Dips in Apple’s stock have generally been followed by a continued and sustained growth streak. The question I get from investors now is along the lines of how high can it go? Can Apple get to a $2T market cap? I don’t have the answers to these questions, but if the growth areas continue to ramp, then I don’t think Apple stock is anywhere near its peak at the moment.

Product Perspective
The obvious areas to keep an eye on are wearables and services. Both businesses remain dramatically underpenetrated as a percent of the iPhone installed base. But the question then becomes, what should we expect AirPods, Apple Watch, and services to reach as a percent of the iPhone base? Investors are asking if this is an iPad growth ramp scenario or if it can, these businesses penetrate more of the iPhone base than iPad did? My hunch is they can for various reasons.

Werables. As great as the iPad is, for most of its owners, it is a luxury more than a necessity. Yes, we can debate this since I know people love their iPad, but for most, if they had to choose between their smartphone or Mac/PC over iPad, I think a good chunk would choose their smartphone and Mac/PC. Now, while we can certainly debate if AirPods or Apple Watch are luxury or necessity, I think some of the fundamental and inherent life value both products offer, they can both align closer to necessity.

The other element that sets AirPods and Apple Watch apart from iPad is their connection to the iPhone. The iPhone is still the center of consumer’s computing lives and peripheral computing experiences like AirPod and Apple Watch, which leverage and, to a degree augment the iPhone’s capabilities. My theory, for now, is those products that are companions to iPhone have a higher TAM potential when looking at how they can grow to the iPhone base of customers.

All of that to say, the growth run for Apple’s Wearables business still has plenty of room to grow.

Services are the other significant growth area for Apple, but also one where many questions remain, which may not be answered into well into 2020.

From all the data and global research studies I’ve seen, the highest any subscription service from Apple (iCloud and Apple Music) has penetrated is roughly 30% of the iPhone base. A worthy, and important, side note here is the smart global research reports I’ve read separate their analysis of services potential to first-hand iPhone owners and n-1/2 iPhone owners. First-hand owners are those who are using a brand new device, and n-1/2 are those using older devices that were either purchased new or acquired via a second-hand avenue. This is important because the data is extremely revealing around the behavior of iPhone owners who have new devices and those using older ones. This data consistently shows when users get more capabilities (features, specs, etc.) on their iPhone, they do tend to spend more with Apple. This confirms my theory that as Apple moves its base to the latest generation technology, the upside for ARPU goes up.

The other interesting data point, is as Apple’s customers get more expensive >$900 iPhones they tend to purchase Apple Care, which is also a sleeper revenue stream. When you look at services potential as more than just Apple TV+, News+, Apple Music and Apple Arcade and include iCloud and Apple Care, then you see how services as a whole is a product line as well for Apple.

Again, the main question is how deep into the Apple customer base can Apple services realistically penetrate. This is where I think having a range of options of different services, and perhaps a bundle can help this revenue stream reach its upside. I know it sounds strange to say this, but I firmly believe Apple is still learning the core behaviors of its customer base and has not yet pulled all their potential levers to grow and offer as wide a range of services as possible. Apple has several options on the table, and as they become confident about how best to provide value with things like broader bundles, pricing, and even family plans, then I think they will expand the offerings and options.

Further, as we think about 2020, do not expect anything AR glasses from Apple in 2020. And while I do think Apple will get some lift for iPhone sales from 5G devices later in this year, I think the 5G iPhone story gets dramatically stronger in 2021/2022 and we will revisit that narrative toward the end of this year.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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