One of the brightest spots in Apple's well-received third quarter earnings report was a surge in its wearables, accessories and home business -- revenue in that segment grew 48% year-over-year to $5.1 billion. In wearables alone, which includes Apple Watch and Air Pods, growth accelerated to "well above" 50%, CEO Tim Cook told investors. Apple shares rose 2.4% Wednesday to close at $213.04, taking its valuation to just shy of $1 trillion.
"If you look at that business over the past seven quarters, you've seen growth of anywhere between 30% and 40%. Clearly, the law of numbers would tell you you'd see a deceleration; instead we see a reacceleration here," said Angelo Zino, analyst at CFRA Research.
Apple Watch is the biggest driver of growth in the segment, as Apple pointed out on Tuesday, and Air Pods are seeing strong sales as well. But the surge in Apple's wearables business also tracks with a tried-and-true Apple playbook of raising prices on a device as the product cycles advance -- just like it did with the iPhone, Zino explained.
The Apple Watch Series 4, for instance, ranges from $399 to $799; the first version released in 2015 started at $349. That helps to boost the average selling price of the devices as more customers snap up the latest version -- on an earnings call Tuesday, Cook said that 75% of customers who bought an Apple Watch in the third quarter were buying their first ever Apple Watch.
Higher unit sales plus higher ASPs bode well for Apple's ever-diversifying product story, according to Zino.
"Wearables also have a higher margin profile than the rest of their hardware businesses," he noted. "As you see greater representation of wearables over time, alongside services, that will continue to benefit the company."
The Apple Watch, in particular, has slowly but surely emerged as a sleeper hit over the past couple of years -- and Cook has made it known that Apple has big ambitions for the device.
The Apple Watch Series 4 supports health features like an EKG capability and fall tracking, and at WWDC, Apple announced that the watch will have its own standalone app store -- suggesting that the company views it not as an iPhone-adjacent accessory but as an essential device for Apple customers.
As more Apple customers snap up Apple Watches, it seems more investors are growing to appreciate it as well. Year to date, Apple's stock is up 32%.