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Apple's New AirPods Are a Big Deal

Ashraf Eassa, The Motley Fool

There have been rumors flying around that Apple (NASDAQ: AAPL) planned to launch an updated version of its highly successful AirPods wireless earbuds for quite some time. Well, in what seems to be a relentless cadence of new Apple product launches, Apple finally announced its updated AirPods on March 20.

Here, I'd like to go over the improvements that Apple made to the AirPods and why investors should care.

A woman with AirPods in her ears.

Image source: Apple.

New chip, wireless charging

Apple says that the new AirPods are powered by a new, Apple-designed chip called the H1. This chip was "developed specifically for headphones," and per the company, "delivers performance efficiencies, faster connect times, more talk time and the convenience of hands-free 'Hey Siri.'" All of these improvements are likely to be compelling selling points that unequivocally make the user experience better.

The fact that these core improvements seem to be enabled by Apple's custom-designed H1 chip is a testament to the value that Apple's in-house chip teams deliver to the company. Apple's ability to decide on what user experience it wants to bring to its customers and then task an in-house chip team to build chips to meet its exact requirements is a clear competitive advantage.

At the product level, Apple says that talk time is up 50% compared to the previous generation of AirPods and that "switching between devices while listening to music on iPhone, Apple Watch or iPad is more seamless than ever with two times faster connect speeds."

Beyond those enhancements, Apple is now offering customers the option of buying AirPods with a wireless charging case, which the company says "is designed to offer the freedom of wireless charging with Qi-compatible charging solutions."

It's worth noting that the price difference between the new AirPods with the standard charging case and the ones with the wireless charging case is $40. Apple is also selling the wireless charging case separately for $79, and that case will work with both the new AirPods, as well as the last-generation models.

Investment implications

Apple's first-generation AirPods were already hugely successful and it looks like these new models are compelling-enough improvements to keep the momentum alive. They have enough new features that customers who previously passed on the first-generation models might be compelled to give this second-generation iteration a chance.

What's even more interesting now, though, is that Apple offers these new AirPods both without and with the wireless charging case. The model with the standard case costs the same as the previous generation AirPods, but the one with the wireless charging case commands a $40 premium. I doubt that the incremental manufacturing cost of the wireless charging case versus the standard one is $40, so not only does Apple have an opportunity to boost its AirPods average selling prices -- and, by extension, total revenue -- but it could see better overall profitability, as well.

Apple's AirPods revenue is recorded as part of the company's wearables, home, and accessories reporting segment, which made up nearly 8.7% of the company's revenue last quarter. The segment also enjoyed robust revenue growth of 33% year over year in that period, too. These new AirPods should help this segment continue to post strong growth numbers as the fiscal year progresses -- something that should continue to aid Apple in its quest to diversify beyond the iPhone.

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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: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy .