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Investment Thesis
Apple (NASDAQ:AAPL)’s endeavor into the healthcare sector, driven by their technological advancements in AI, arranges it as a potential game-changer in the health wearables market and beyond. The company’s incorporation of health features into their devices such as the Apple Watch, along with collaborations with healthcare organizations, demonstrates a clear motive to further develop both personal health tracking and medical research. Apple’s formidable market presence, exemplified by over 1 billion active iPhones and 100 million Apple Watches globally, intensifies their influence in the healthcare realm allowing them to have unparalleled access to healthcare data that most medical providers cannot gather on their own.
One of Apple’s main methods of this incorporation into the healthcare sector is through AI, more specifically their AI framework “Ajax,” and advancements in VR and AR. Their ability to better visualize and process all this healthcare data as a new revenue model to insurance companies, pharmaceutical companies and medical professionals can be unparalleled in my opinion. However, alongside regulatory and privacy concerns (given the medical field is such a complicated industry), there will likely be points of resistance in this advancement. In my opinion, their adoption of healthcare tech and using AI to better analyze the technology is a huge opportunity. I believe the stock is a buy.
Background
Apple’s expansion into the healthcare sector represents a big change in their business strategy, which aims to augment the company’s role from just a technological & software giant to contributing a crucial piece in healthcare. Their movement isn’t only about improving personal health monitoring but will also play an important role in the development of patient care and medical research. Apple already has access to medical data that is unparalleled in terms of the quantity of people they can serve. I believe their strategy can unlock an opportunity worth over $100 billion annually for the firm.
Apple’s Strategy
Apple’s journey into the healthcare industry could significantly alter the market of wearable health devices along with the broadening of the healthcare sector. In my opinion, their ventures into healthcare are organized into three sections which I think are key:
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Innovative Technology (& Data)
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Key partnerships with healthcare companies for key distribution channels
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Strong emphasis on user and data privacy.
One, Apple Watch and Healthcare Data Applications
The primary focus of Apple’s healthcare strategy is the Apple Watch, which acts as a personal health hub. With the release of iOS 17, iPadOS 17, and watchOS 10, Apple has added health features such as medications reminders and Journal apps. These features aid users in managing their health, including mental health awareness and medication consumption.
First, from the healthcare provider side, Apple is also partaking in the creation of custom apps to be used for medical research via their ResearchKit framework, which will make the process of enrolling participants, capturing informed consent, and collecting medical information much smoother for researchers. As a side note, Apple has a really powerful video on how partners are building important apps using this research kit. I recommend you check it out.
But mainly, Apple has leaned on an Emphasis on personal health and fitness, aiming to provide users with more information and act as an “intelligent guardian for their health.” The Health app on Apple devices enables users to store and manage over 150 different types of health data. The key part of this approach is that it provides both users and healthcare providers with crucial health data that can affect treatment while giving users a better feedback loop so they know how their health is doing, and how users can adjust their health in real time.
To power these offerings, the Apple Watch offers a variety of health software features & tools, such as:
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AFib History and ECG App: Facilitating atrial fibrillation tracking and providing the ability to perform an electrocardiogram.
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Blood Oxygen Monitoring: Enabling users to measure their blood oxygen levels.
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Heart Rate Monitoring: Offering notifications for high and low heart rates, as well as irregular rhythms.
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Mobility and Cardio Fitness Metrics: Including walking quality metrics and estimates of Cardio Fitness (VO2 max).
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Fall Detection and Crash Detection: Detecting hard falls and allowing users to call emergency services.
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Cycle Tracking: Assisting in menstrual health monitoring.
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Sleep Tracking: Helping users monitor their sleep patterns.
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Noise Monitoring: Aiding in hearing health by monitoring environmental noise levels.
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Medication Reminders: Reminding users to take their medication and tracking consumption.
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Temperature Sensing: For general wellness monitoring.
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Emergency SOS and International Emergency Calling: Ensuring users can quickly contact emergency service
Two, Key partnerships with healthcare companies for key distribution channels
With the strong features through the Apple Watch and software programs on users’ iPhones, a crucial part of this advancement is the partnerships Apple conducts with healthcare organizations. The goal of these partnerships is to enhance the delivery of healthcare and provide advancements in medical research. These partnerships are how Apple will likely monetize their healthcare strategy. Much like how users’ attention spans on Meta (META) are the product, the healthcare data on Apple’s servers will serve as a power data set for them to monetize (with the users consent -more on this later).
With the goal of advancing medical research (and proving the validity of their data sets), Apple collaborates with research on topics such as women’s health and cardiac care. For example, Apple is working with Harvard T.H. Chan School of Public Health and Stanford to conduct longitudinal public studies and virtual cardiac clinical studies. These studies aim to gain insights into the relationship between menstrual cycles and health conditions, as well as identify irregular heart rhythms that could indicate serious conditions like atrial fibrillation (note: the Apple Watch is FDA approved as an Afib detector for users over 22 years old).
Apple’s collaborations with healthcare companies goes beyond traditional healthcare applications. They are also venturing into the potential of virtual reality (VR) and augmented reality (AR) in healthcare. Recently Apple has participated in work in the VR and AR sectors, such as PrimeSense, Metaio, and Mira. These technologies can be used for virtual reality therapy, mental health conditions, medical training simulations, and educational experiences. The recently unveiled Apple Vision Pro headset is expected to play a significant role in these developments. All the while they collect user data.
On the consumer side, companies such as Paceline, Vitality Active Rewards, and LumiHealth have also done work with Apple as well in order to integrate the Apple Watch into wellness programs. Currently, there are 55 such programs running in 17 countries, engaging over a million users. These programs have successfully increased physical activity levels and promoted healthier lifestyle choices among their users.
In the hospital setting, Apple’s products are revolutionizing how doctors and nurses interact with their patients. Hospital workflows are becoming more efficient, allowing healthcare providers access to health records all via apps created by Apple. These advancements are actively improving patient safety and engagement in their care.
With over 1 billion active iPhones and 100 million Apple Watches globally, Apple’s reach in the healthcare sector is significant. Apple is basing an emphasis on clinically approved features that reach beyond consumer-focused wellness apps to transform diagnostics and treatments in the medical realm. Their monetization potentials are immense
Three, The Lucrative Nature of Healthcare Data (And Apple’s Privacy Approach)
Apple’s users’ data could be worth billions of dollars in the right hands for medical providers and pharmaceutical companies. However, they first have to address the elephant in the room: privacy.
Privacy is a big concern when it comes to health data for some, but Apple’s healthcare strategy has a strong commitment to user privacy. Apple ensures that all health and fitness data in the Health app is encrypted and only shared with user permission. This is shown in the Health app, which gives users a safe place to store their health data. Another feature is HealthKit API, which allows third-party apps to provide health and fitness recommendations or experiences while still staying consistent to the promise of user privacy.
The approach taken by Apple as they dive into healthcare data shows their commitment to revolutionizing the collection, use, and monetization of health-related information. This strategy is deeply woven into Apple, leveraging the technological sophistication of their devices and their vast user base. This is key because in order for Apple to get a set of user data that they trust, they first have to convince users to share their medical data with them first. I believe Apple’s privacy push is part of this, helping to condition users to trust their firm, so they can play the long game and get some of the most sensitive user data out there (medical data). This has shown with Apple ranking much higher than other tech giants (like Meta) in terms of trust by consumers.
Finally, as I mentioned before, there is the Research app, a key part of Apple’s healthcare journey. The key part here to really focus on is that the app allows users across the US to voluntarily partake in pioneering research studies such as the Apple Women’s Health Study, Apple Heart and Movement Study, and Apple Hearing Study. This approach not only focuses on data collection but also aims to provide crucial insights that can heavily contribute to medical research and the management of individual health. The exciting part about this is that Apple is able to merge its vast quantities of data with its desire to protect users’ privacy. What’s also exciting about it is that this lowers the cost of running a study, as the cost to get a user’s data is much lower (given you don’t have to buy hardware, do a lot of user onboarding, or place them in the same physical location as you).
The Belated AI Product: A Game-Changer For Apple?
Despite entering the AI race later than some of their competitors, Apple has still managed to make impressive advancements in the field of artificial intelligence. The production of their AI software, “Ajax,” signifies their intentions to integrate AI throughout their products, which could significantly impact the revenues gained from their services and software, especially in the healthcare space.
Apple’s approach to integrating AI in healthcare is a multifaceted strategy, focusing on personal health, research collaboration, and the development of innovative health features. Apple has taken painstaking efforts to put healthcare devices (Watches and iPhones) in the hands of collectively over 1 billion people. They now have the software and AI to tie these endpoint pieces of data together and create unique offerings. These are some of the initial offerings Apple is breaking into.
Advancements in Health Research
Like I mentioned before, Apple’s Research app offers users the opportunity to participate in groundbreaking studies, such as the Apple Women’s Health Study, Apple Heart and Movement Study, and Apple Hearing Study. These initiatives are in partnership with health organizations and aim to integrate Apple Watch into their wellness programs, thereby contributing to the increase in participants’ physical activity levels and health behaviors. The exciting part of this product is that this becomes one of the end points researchers can use (from Apple) to access their unique data. In a lot of ways, it becomes a necessary part of their workflow as more people engage with Apple Research for studies.
AI-Powered Health Coaching Service
Apple is reportedly developing an AI-powered health coaching service, code-named Quartz. This service is designed to motivate users to exercise, improve their eating habits, and enhance their sleep quality. It aims to use AI and data from the user’s Apple Watch to develop personalized coaching programs. The service is expected to have a monthly fee and is part of Apple’s broader strategy to integrate AI into health and wellness.
Innovative Health Features
Apple plans to introduce features focusing on various health areas such as heart health, sleep, women’s health, and mobility. The Apple Watch and iPhone will store and analyze more than 150 different types of health data. Apple is also working on technology for tracking emotions and managing vision conditions. These advancements will be complemented by an iPad version of the iPhone Health app, allowing users to view their health data on a larger screen.
Future Developments
Apple plans to soon introduce a basic form of blood-pressure monitoring to the Apple Watch. This feature will alert users to potential hypertension and further add to the sets of medical data that they can get from users. Additionally, Apple is working on non-invasive glucose monitoring technology, aiming to incorporate it into future Apple Watch models. This technology will use sensors to take blood sugar readings without the need for finger pricks.
What is the HealthCare Technology Worth to Apple (Valuation)
While it’s not new that Apple has been making a pursuit into the healthcare field, I think the results are just starting to bear fruit.
For reference, the United States alone spent over $4.5 trillion on healthcare in 2022 (averaging out to about 13,493 per person). If Apple were to capture just 2.23% of total healthcare spend in just the US (this does not include developed markets like Japan or Europe, or China which is one of its biggest markets), this could create an additional $100 billion in revenue. This could come in a litany of ways including through the new software platforms and services, hardware devices (think more Apple watches in hospitals for nurses and patients) and selling healthcare analytics/records through your health insurer.
Apple currently trades at a forward price to sales of 7.75. If investors simply rewarded a forward price to sales multiple on this revenue (which will likely be durable and higher margin) of just 6x prices to sales, this could unlock an additional $600 billion in market cap for Apple. This represents ~20% upside from its $3.08 Trillion close as of the time of this writing. This would imply a fair value of the stock of somewhere near $237.70/share (assuming no buy backs – they do a ton of these so the fair value could be even higher).
Think my estimates are too aggressive? Morgan Stanley (as early as 2019) has forecasted Apple could bring in as much as $313 billion in revenue from healthcare in 2027. They forecasted $15 billion in revenue possibilities by 2021, and while Apple didn’t disclose healthcare related revenue in 2021, I think it’s definitely possible that they may have hit it. They did over $365 billion in revenue in the FY 2021 year. Keep in mind that this $15 billion figure includes marginal sales of Apple devices to healthcare related companies because of the software offerings Apple has helped create.
Risks and Challenges
The biggest elephant in the room for Apple is its increased exposure to regulatory burdens by working in the healthcare space. Navigating the complex regulatory environments of different countries and regions, especially concerning data privacy and security, is very important for Apple’s success in healthcare. Take in the US for example, where privacy laws regulate and necessitate different storage strategies in each of the 50 states.
In spite of this, I think management has solid frameworks in place for user data protection and privacy. Importantly, Apple also has some of the best in class encryption available for its devices meaning that (in many cases with some criminal proceedings) even law enforcement has to spend months trying to get into your phone.
Additionally, Apple’s ambitious healthcare initiatives have encountered some issues. The company had plans to form their own primary-care medical service and hire Apple-employed doctors. But according to reports this movement has stalled, which resulted in a shift directed more towards selling devices like the Apple Watch which has been largely successful.
Big Takeaway
I believe Apple’s approach to healthcare, marked by technological innovation, strategic partnerships, and a strong emphasis on privacy and security, places it on route to become a revolutionary force in the healthcare industry.
The company’s combination of health features in consumer devices like the Apple Watch and iPhone, along with collaborations with leading healthcare organizations and research institutions, really demonstrates Apple’s commitment to the advancement in healthcare technology and helps unlock an opportunity that could be worth over $100 billion annually in my view. Above all these initiatives not only enhance personal health management, but also contribute to medical research and patient care meaning we all can benefit from the learnings that Apple data will provide. This goes without saying that Apple’s integration of Ajax into the mix will mean increased analysis capabilities on these large sets of unique data. Unique data, unique access and unique analysis (through Ajax) presents investors (in my opinion) with a unique opportunity to get in. I think Apple is a buy.