Without Apple, AirPods Would Just Be Another Loser

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This month, a somewhat serious meme has been going around on Twitter and elsewhere purporting that Apple’s AirPods, if spun off as a separate company, would be valued at $175 billion. That’s the lofty level of real companies like Oracle and Adobe and Cisco Systems.

The boast isn’t entirely crazy. It’s quite possible that Apple’s wearables unit will bring in $20 billion in sales next year and have a gross profit margin around 35%.

But to get to the $175 billion valuation, you have to assume that investors would value a gadget maker at 17 times its sales or 25 times its profit. Not only would that be far more than Apple itself, which trades for about 4 times its sales or 22 times its profit, but it also ignores the market’s harsh view of a whole host of similar struggling companies. As we’ve said more than a few times around here, hardware is hard.

A long securities filing made public by Fitbit brought the true rejoinder to the AirPods silliness. The proxy form details Google’s $2 billion bid for the company and urges shareholders to vote in favor of the deal. It’s mostly pretty dull reading, but then you get to an eye-opening chart. Fitbit’s investment bankers drew up a list of comparable companies, like GoPro and its action cameras or Sonos with smart speakers, to help decide how much Fitbit might be worth. With only a few exceptions, these companies were trading at a bottom-of-the-barrel valuation of 1 times their sales or less.

valuation of hardware companies

Investors don’t dislike independent hardware companies—they hate them. Apple and Garmin are a rare exception. Software and service providers trade at much higher levels: Microsoft sells for almost 8 times its sales, Google for 4 times, and even unloved Uber for almost 3 times. Tragically, many hardware companies were valued for much more when they first went public. Fitbit’s stock price dropped 80% from its IPO before Google swooped in. By then, it was trading for a meager 0.4 times its revenue.

Maintaining an independent consumer hardware business is a losing battle in which companies get squeezed between cheap imitators and much larger rivals with more control. If AirPods went out on their own, they’d probably suffer the same fate.

Aaron Pressman

Twitter: @ampressman

Email: aaron.pressman@fortune.com

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