We are publishing our Apple model with forecasts out to 2022 including Apple Glasses, an AR wearable, starting in 2020. By year end of 2022, we see net revenue of $292B and EPS of $13.20, up from $221B and $8.74 in FY17 (Street at $227B, and EPS $8.95) in FY17. Gross margin stays close to constant as Apple Services’ higher margin offsets declining iPhone hardware gross margin. The auto opportunity is not in our model. Here are our 5 takeaways.

Services: Steady, Growing, Profitable. We expect steady growth from Services over the next 5 years. In Mar-17, Services accounted for 13% of revenue and grew at 18% y/y. We believe that in 2022 Services will account for 21% of revenue and grow at 14% y/y. Our confidence is supported by the predictability of Services over the past two years, along with our belief that AR apps will be a catalyst for consumer spending on apps over the next 5 years. This segment should remain about 2x more profitable than Apple’s hardware business with a ~60% gross margin, with gains in margin from Services offsetting the loss of margin in hardware. Our gross margin for Apple overall goes from 38.9% in Mar-17 to 38.4% in FY22.

iPhone: Growth Peaking In FY19, Then Slowly Decline As Apple Glasses Emerge. We expect iPhone revenue to grow at 15% in FY18 (essentially the next iPhone cycle) and account for 64% of revenue. We’re modeling for 12% unit growth as the next iPhone should inch up ASPs to $674 from FY18 from $651 in FY17. We believe tough comps after the next iPhone cycle will have a negative impact on iPhone growth in FY19, and in FY20 we believe Apple Glasses will start to impact iPhone sales. For FY19 we’re modeling revenue up 1% y/y and units up 3% as ASPs drift down to $663 as more AR-related features (e.g., cameras and sensors) are included in base iPhones. For FY20-FY22 we have iPhone revenue declining by ~3-4% y/y and units down 1-2% based on continued ASP pressure to $620 in FY22. We expect iPhone will account for 48% of sales in FY22. In 10 years we expect the iPhone will be around, but be a much smaller part of Apple’s business as Apple Glasses slowly gains market adoption.

Apple Glasses In FY20. Our best guess is that Apple Glasses, an AR-focused wearable, will be released mid FY20. This is based on the significant resources Apple is putting into AR, including ARKit and the recent SensoMotoric Instruments acquisition. We believe Apple sees the AR future as a combination of the iPhone and some form of a wearable. With an average sale price of $1,300 we expect initial demand to be limited at just over 3m units compared to 242m iPhones that year. This equates 2% of sales in FY20 increasing to 10% ($30B) in FY22 when we expect the ASP to be about ~$1,000. This growth curve is modeled after the iPad initial growth. We expect a different growth curve for Apple Glasses vs. the iPad, and believe the product will continue to increase as a percentage of sales for the next ten years.

AirPods: Bigger Than Apple Watch. Over the next 10 years, we anticipate that AirPods will be bigger than the Apple Watch as the product evolves from simple wireless headphones to a wearable, augmented audio device. While both AirPods and Apple Watch should continue to grow, we see AirPods contributing about the same amount of revenue as Apple Watch by FY22. We expect the AirPods ASP to increase from $159 today to $200 in FY22 as the product shifts to augmented audio.

Auto: Not In Our Model. We excluded auto from our model because Apple’s go to market strategy is unclear. In an interview with Bloomberg, Apple CEO Tim Cook confirmed Project Titan, Apple’s car project. Cook referred to this as “the mother of all AI projects.” While the project hasn’t been a well-kept secret, Apple’s public confirmation is noteworthy. Cook referred to the three specific areas: self-driving technology, the electrification of vehicles, and ride-hailing as “three vectors of change happening generally in the same time frame.”

How Will Apple Go to Market in Auto? There are three ways we see Apple potentially bringing its car technology to market. The first option would be to partner with a manufacturer to bring an Apple-branded car to market. The second option would be to focus on developing software and implementing it across as many car platforms as possible. Lastly, but unlikely, the could enter as a fleet service.

Partner With a Manufacturer. Apple could partner with a manufacturer to bring its own branded car to the market, just as they do with the iPhone and iPad. By partnering with a manufacturer, Apple would have design control over the product, and would be able to customize the user experience as much as possible. On the other hand, manufacturing a car is very different than manufacturing a smartphone. Apple could even acquire a car manufacturer to do this. Some think it makes most sense for Apple to acquire Tesla, but we have already written about why this is most likely a fairy tale.

Apple could partner with a manufacturer to bring its own branded car to the market, just as they do with the iPhone and iPad. By partnering with a manufacturer, Apple would have design control over the product, and would be able to customize the user experience as much as possible. On the other hand, manufacturing a car is very different than manufacturing a smartphone. Apple could even acquire a car manufacturer to do this. Some think it makes most sense for Apple to acquire Tesla, but we have already written about why this is most likely a fairy tale. Develop Software for Autonomous Vehicles. Another option is for Apple to license its technology to current auto manufacturers for use in their vehicles. Apple could be the OS of the future for cars. This may be the more likely option. In order for widespread adoption of fully autonomous vehicles, cars would need to have hardware and software integrated into their design that would not only operate the vehicle, but also communicate with surrounding vehicles at all times. In this scenario, Apple would expand its presence in the automotive market significantly and further expand the halo effect of their product lineup into autos.

Another option is for Apple to license its technology to current auto manufacturers for use in their vehicles. Apple could be the OS of the future for cars. This may be the more likely option. In order for widespread adoption of fully autonomous vehicles, cars would need to have hardware and software integrated into their design that would not only operate the vehicle, but also communicate with surrounding vehicles at all times. In this scenario, Apple would expand its presence in the automotive market significantly and further expand the halo effect of their product lineup into autos. Fleet Unlikely. We do not expect Apple to operate a ride-hailing service.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.