Here's Why Apple Is Finally Upgrading the iPod Touch
Apple (NASDAQ: AAPL) has long sold a product line known as the iPod Touch, a handheld mobile computing device that doesn't have cellular connectivity built in. That product line has been in decline for some time as smartphones -- devices that offer similar functionality in addition to the benefits that cellular connectivity brings -- have become ubiquitous.
Apple last updated the iPod Touch over three years ago, offering customers an upgrade to the company's A8 applications processor from the A5 that had powered the previous model.
Image source: Apple.
According to respected analyst Ming-Chi Kuo with TF International Securities, the iPod Touch product line still has some life left in it as Apple plans to launch a version of the device with an upgraded applications processor later this year.
Here, I'll go over what applications processor I think the device will have, as well as Apple's potential business rationale for continuing to invest in the iPod Touch product line.
Betting on the A10 Fusion
When Apple launches new iPhones this fall, it's likely that the current A11 Bionic-powered iPhone 8 and iPhone 8 Plus will become the company's entry-level iPhones after the iPhone 7 and iPhone 7 Plus -- both powered by the A10 Fusion -- are discontinued.
It seems likely that Apple will want to ensure that the lowest-end iPhone that it sells still offers better performance than the latest iPod Touch, particularly given that even the lowest-end iPhone tends to be pricier than the highest-end iPod Touch.
The obvious choice for the applications processor inside the next iPod Touch is the A10 Fusion. That chip still offers a massive upgrade in both CPU and GPU performance over the A8 chip inside the current iPod Touch while also ensuring that the updated iPod Touch doesn't step on the toes of the lowest-end iPhone that'll be offered alongside it.
Why continue to invest in iPod?
It's clear that iPod Touch revenue isn't all that much these days -- it's just one component of Apple's wearables, home, and accessories segment, which itself made up less than 8.7% of the company's revenue last quarter.
However, there are still good reasons for Apple to keep the product line around and relatively fresh. Keep in mind that Apple is keenly focused on bringing as many individuals into the iOS ecosystem as possible as its services business becomes an increasingly important part of the overall Apple story.
The iPod Touch could, for instance, be a product that parents buy their children to allow them to watch movies, browse the internet, and play games. Over time, those children could wind up quite embedded in the Apple ecosystem, meaning that when they finally make the jump to a smartphone, they're more likely to want to go with an iPhone to bring their apps and content with them. That, in turn, could lead to that customer becoming further integrated into the Apple ecosystem via products like Apple Watch, iPad, and Mac.
Beyond that strategic utility, there's also the simple fact that the iPod Touch doesn't require a lot of incremental investment. The devices tend to recycle components and technologies that were developed for the company's iPhone product lines, and their product cycles are very long (Apple last updated the iPod Touch in July of 2015); so even if iPod Touch sales aren't that significant -- perhaps, say, in the hundreds of millions of dollars per year -- Apple is still probably generating a significant return on its investment.
Investor takeaway
A new iPod Touch isn't going to be a game changer for Apple stock: The total market for such products just isn't that large, and over time, I think the trend is still down. However, the fact that Apple is preparing an update to the product line indicates that iPod Touch sales are still significant enough for the company to invest in rolling out periodic updates.
With that said, I do think that at some point down the line, iPod Touch sales will be so minimal that Apple will have a hard time justifying the investment in future models. The iPod Touch that Apple is reportedly set to launch later this year could very well be the last of its kind.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
