InvestorPlace’s Brad Moon wrote an excellent piece on April 7 about why Apple (NASDAQ:AAPL) hasn’t put more effort into its Home Pod smart speaker. And if you own Apple stock, that’s something to be happy about. Let me explain
Focus on What Works
My colleague’s article pointed out that Apple’s Home Pod sales reached 2.6 million units in the fourth quarter due to a $100 price cut by retailers to $199. That’s a significantly lower retail selling price than either the Apple Watch Series 5 ($399 and higher) or the AirPods Pro ($249).
According to MacRumors, Apple’s share of the global smart speaker market at the end of Q4 2019, was 4.7%, putting it well down the list in sixth spot. Sure, it gained 60 basis points of market share over Q4 2018, but the next three companies, Xiaomi (OTCMKTS:XIACY), Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU), gained 390, 250 and 490 basis points respectively.
While Apple was taking market share from Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the 3rd, 4th, and 5th-placed companies were taking more.
It would be one thing to double down if it were getting $499 a speaker, but it’s not. So either Apple’s innovation department comes up with something for the Home Pod in the future that is so wonderfully innovative that it can boost the price to deliver Apple’s typical margins, or the company can focus its energies where the return is higher.
As Brad said, AirPods generated $6 billion of revenue in fiscal 2019 and are expected to bring in $15 billion in 2020. As for the Apple Watch, based on 30.7 million smartwatches sold in 2019, it brought in an estimated $12 billion. I’m sure that despite the coronavirus, its smartwatch sales will continue to do just fine in 2020.
Two things that could put some air under Home Pod’s growth could include enabling the speaker to play music from other third-party music services. Apple could also introduce a lower-end version to compete with the Amazon Echo and Google Home.
But Apple’s never been keen to widen its ecosystem, so why start now? As for a lower-end version, it might sell additional units, but it would do so at the expense of margins. The fact that Apple had $207 billion in cash on its balance sheet at the start of December means it doesn’t have to lower itself to the competition. It can afford to wait for its R&D team to come up with an innovation that makes the Home Pod different.
In the meantime, it can focus on continuing to grow those products and services that are delivering more immediate returns. Like a very talented sports team, the Home Pod is just going to have to wait its turn to get into the game.
And that’s a very good thing if you own Apple stock.
The Bottom Line on Apple Stock
During the coronavirus, I think a good place for Apple to focus its attention is on its e-commerce business. After all, with its retail stores closed, its website has become the face of the company.
At some point, another virus will shut down retail for a while. The lessons it learns from this crisis should help it to keep growing its e-commerce business, removing some of the pressure that’s on its retail stores.
In 2020, Apple’s e-commerce business will generate 3.7% of all U.S. retail e-commerce sales, good for fourth place behind only eBay (NASDAQ:EBAY), Walmart (NYSE:WMT) and Amazon. That’s $25.7 billion in sales from its online business, yet it accounts for less than 4% of the country’s $695 billion in annual total e-commerce revenue.
It can do better.
Focusing on the Home Pod at this point would be a poor allocation of company resources. Until the Home Pod can prove it’s ready to push one of its other products or services aside, it ought to remain on the bench.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
