Apple Inc. (NASDAQ:AAPL) is priced like a low-growth stock, and Wall Street analysts have been quite vocal about their disappointment regarding lack of growth prospects for the company. Although the iPhone has clearly decelerated, the market seems to be seriously underestimating the iPad and its potential impact over the next years.
No slowdown in sight
Apple Inc. (NASDAQ:AAPL) sold almost 19.4 million iPads during the last quarter — that’s a 65% unit increase versus the same quarter last year. In monetary terms, the iPad delivered sales growth of “only” 40% annually; the difference is due to the fact that the very successful iPad Mini is cheaper than previous models.
The iPhone is still the big cash cow with $22.9 billion in revenues for the last quarter and big fat profit margins, but sales growth in the March quarter was only 7% in units and 3% in U.S. dollars. The iPad produced $8.7 billion in revenue, so it´s still quite smaller, although growth rates for the two products are not easy to extrapolate into the future, the iPad could easily become Apple Inc. (NASDAQ:AAPL)’s biggest product in a couple of years or so.
Tablets are clearly cannibalizing PCs, even if they don’t completely replace them, the lines between the two products are becoming increasingly blurry over the last years. Tablets are gaining computing power, and the rise of cloud computing is a big plus for these devices in terms of their competition against good old PCs. As far as I can see, tablets have many years of healthy growth ahead of them before reaching market saturation.
Competitive strength
The biggest problem with the iPhone is pricing, competitors like Samsung (NASDAQOTH:SSNLF) and others have launched a wide variety of products with similar quality and much lower prices than the iPhone. Especially in emerging markets, where carriers don’t subsidize the iPhone as much as in the U.S. and income levels are lower, the iPhone has been losing market share to cheaper alternatives.
The iPad is thinner and lighter and, more importantly, it has more applications than competing products. Apple Inc. (NASDAQ:AAPL) has the first mover advantage in the tablets business, that means not only a technological lead but also a big plus when it comes to ecosystems and customer loyalty.
Once you buy an iPad, you purchase applications and digital products and have everything beautifully integrated with iCloud, you are more likely to remain an Apple Inc. (NASDAQ:AAPL) customer in your next purchase, be it a tablet or some other device.
According to IDC Apple had a 43.6% market share in tablets during the last quarter of 2012, with Samsung and Amazon.com, Inc. (NASDAQ:AMZN) way behind with 15.1% and 11.1% of the market, respectively. New low cost Android tablets will enter the the competition over the next months, Google Inc (NASDAQ:GOOG) is launching a new version of its well received Nexus 7 around July, and different manufacturers will most probably gain market share in the low end segment of the pricing spectrum.
IDC estimates than in 2013 Apple will account for 46% of the tablet market, while cheap Android products will get a 48% participation. As for
Microsoft Corporation (NASDAQ:MSFT), IDC is not too optimistic about its Surface tablets in the middle term:
“There is no question that Microsoft is in this tablet race to compete for the long haul. However, devices based upon its new Windows 8 and Windows RT operating systems failed to gain much ground during their launch quarter, and reaction to the company’s Surface with Windows RT tablet was muted at best.
“In the long run, consumers may grow to believe that high-end computing tablets with desktop operating systems are worth a higher premium than other tablets, but until then ASPs – average selling prices — on Windows 8 and Windows RT devices need to come down to drive higher volumes.”
Putting long-term growth over short-term profits
When it comes to the iPad, Apple Inc. (NASDAQ:AAPL) is following the same successful strategy it used with the iPod; offering a wide variety of choices at different price points and putting long-term growth above short-term profit margins.
From Tim Cook during Goldman Sachs’ Technology and Internet conference:
“You can go in and accept a lower margin on any product for a strategic reason. That strategic reason might be our entry into that area. At the background, we always know that this halo effect play, we had confidence in our ability to execute the supply chain and walk down costs. In the area of tablets, we think the market is huge and it makes sense to have another product there. People wanted a full iPad experience, but in something smaller and lighter. We have other ways to make money and reward shareholders.”
The iPad Mini is Apple´s way to make sure that it won´t get displaced by the competition due to pricing. I wouldn’t be surprised to see the company reducing the price of the current iPad Mini once a new version is launched, or even developing cheaper versions too. This is about long-term growth, not short-term profits.
Bottom Line
The iPad has lower margins than the iPhone, but it’s a high-growth product with remarkable competitive strength and exciting prospects over the next years. Besides, profitability tends to increase with higher production levels. Considering all the talk about lackluster growth prospects for Apple Inc. (NASDAQ:AAPL), it looks like Wall Street may be seriously underestimating the iPad.
The article The Market is Seriously Underestimating the iPad originally appeared on Fool.com.
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