Apple iPad Weakness a Serious Threat to AAPL Stock

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Apple Inc. (AAPL) remains the dominant player in the smartphone space, with its iPhone the gold standard for sales and profitability.

aapl stock logoSure, Google (GOOG) enjoys massive global market share with more phones running its Android operating system … but hardware is where the money is.

Specifically, Apple earnings from its fiscal third quarter show $19.7 billion in revenue from iPhones alone. Google did about $16 billion in total revenue last quarter, by comparison, with the vast majority of that coming from advertising.

But the wild success of the Apple iPhone does cause a conundrum for AAPL stock investors. Namely, as the iconic smartphone matures and relies ever more heavily on the upgrade cycle, Apple stock performance becomes increasingly reliant on the iPhone alone.

Gadget geeks may scoff at the notion that Apple has nothing else going on, what with the recent debut of the Apple Watch and legacy products like the iPod, iPad and MacBook that continue to be a hit with many satisfied customers.

But investors need to remember that AAPL stock is reliant on profit margins, revenue and market share with these devices much more than favorable reviews from a small group of Apple loyalists.

And in the wake of the recent iPad event, it’s worth noting that the tablet market in particular is perhaps the biggest missed opportunity for AAPL stock.

Or taken another way, if Apple iPad sales don’t pick up briskly, it could be very bad news for Apple earnings and AAPL stock going forward.

AAPL Stock and Apple iPad Sales Numbers

First, some context:As I said before, Apple moved $19.7 billion in iPhones last quarter … but here’s the total breakdown of sales, including the iPad, for Apple’s fiscal third quarter according to the July AAPL earnings report:

  •  Apple iPhone sales: $19.7 billion, up 9% from the previous year
  • Apple iPad sales: $5.9 billion, down 8% from the previous year
  • Apple Mac sales: $5.5 billion, up 13% from the previous year
  • Apple iPod sales: $442 million, down 40% from the previous year
  • Apple iTunes and software sales: $4.5 billion, up 12% from the previous year
  • Apple accessories sales: $1.3 billion, up 12% from the previous year

Apple iPhone sales are about half of revenue, and they are what clearly drive AAPL stock. However, notice that the next largest segment is the Apple iPad — and aside from the iPod, a 13-year-old device that has been made redundant by a host of other mobile gadgets, that’s the only segment that is losing ground.

Not good.

I mean, this is supposed to be the age where PCs die — but somehow Apple Macs and laptops could soon account for a larger share of profits than the tablet device that it created!

Apple iPad Sees Falling Market Share

Of course, Apple is eager to stop this trend. That’s part of the reason for a big iPad event recently.

apple ipad market share
Click to Enlarge

This great Wall Street Journal graphic illustrates data from an IDC survey indicating that many iPad users haven’t upgraded, and are instead sitting on older devices. Couple that with reports that Apple has just a 27% market share of the tablet market, down from a near 100% share when it basically created the space with its iPad launch in 2010, and the fact that Samsung (SSNLF) is gaining fast at 17% market share and the picture doesn’t look pretty.

And by the way, other companies are just as eager to rise to the top as Apple is eager to stay there. Microsoft (MSFT) has put a lot of energy into its Windows 10 operating system that is optimized for mobile, as well as its Microsoft Surface tablet.

There is a chance that Apple’s newest line could counteract this trend.

The WSJ aslo quoted one expert as saying that just 11.5% of iPads were enterprise sales to corporations and governments, and that the figure could jump to 20% in 2018.

There are also many out there who think that the upgrades to the iPad mini, coupled with the iPhone 6 plus, will allow Apple to keep clawing back market share from folks who want something bigger than a smartphone but smaller than the full-size iPad.

But these are obviously leaps of faith, and not certainties.

And considering the history of AAPL stock failing to gather momentum in iPad sales, as well as the lower profit margins that come from tablets broadly and smaller tablets like the iPad Mini specifically, it’s worth wondering how realistic this plan for iPad profits is.

We’ll find out in Apple earnings on Oct. 20 just how good — or bad — iPhone sales have been. And in the near term, that will continue to drive AAPL stock.

But in the longer term, Apple simply must figure out its tablet strategy if it wants to continue growing and delivering profits to shareholders of AAPL stock.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/apple-ipad-sales-aapl-stock/.

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