Apple Could See 'Breakout Year' for Wearables in 2020, Analyst Says

Jefferies analyst Kyle McNealy sees new product launches and a wearables business reaching scale as two drivers behind higher revenue and earnings estimates for Apple.
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Apple could see a breakthrough in its wearables business in 2020, according to an analyst at Jefferies. 

Apple shares rose 0.63% to $320.86 Wednesday, as the broader U.S. market rallied as fears about the coronavirus abated

"We see fiscal 2020 as a breakout year for Apple's Wearables business," wrote Jefferies analyst Kyle McNealy in a note. "Multiple 2019 product launches, potential average selling price expansion from AirPods Pro, and strong customer interest across product lines support our view that 2020 will be a meaningful inflection point for the business."

McNealy said he's looking for Wearables to contribute 3% to 4% of total company growth for 2020 and 2021, although he didn't specify if he meant revenue or earnings growth. 

Recently, optimism on 5G device demand and strong results for iPhone 11 sales and services growth has led to significant stock gains for Apple. Analysts have raced to hike their price targets on higher estimates for the next 12 months, as well as the next several years. 

Wearables revenue was $10 billion in Apple's December quarter, beating estimates of $9.85 billion and representing 11% of Apple's total revenue for the quarter. 

McNealy says wearables have reached scale and that AirPods and Apple Watches can contribute 3% and 1%, respectively, to total revenue in 2020. "This contribution is driven by multiple new products ramping for the category with AirPods Pro contributing $6 billion in revenue and $0.22 in earnings for the year alone," he said. Those 22 cents would represent 1.5% of his total 2020 EPS estimate. 

McNealy raised his 2020 EPS estimate to $14.25 from $14.15 and his 2021 EPS estimate to $16.45 from $16.20. His price target is $370, implying 15% upside from the stock's current level.  

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