They say a picture is worth a thousand words. If it’s true, then the picture of how Apple (AAPL) iPad sales have cooled off in recent quarters paints a mildly alarming picture.
Granted, Apple stock clearly hasn’t been adversely impacted — AAPL is up 20% year-to-date as strong sales of the iPhone have adequately offset waning tablet sales figures. Still, anyone who owns AAPL shares for the long haul should be wondering what the company plans to do should iPhone-mania cool to merely moderate levels.
iPad Sales Are Lackluster … Again
Last quarter, iPad sales fell more than 9% to a multiyear low of 13.28 million. That was a little more than 9% below the previous quarter’s iPad sales total. It also was the second sequential decline in iPad sales after peaking at 26.04 million in fiscal Q1 2014.
Data provided by Statista
Apple stock owners have seen similar sales contractions before, not just from the iPad but from the always-popular iPhone as well. However, this is the first time we’ve seen the sales trough for either of its key products make a new quarterly low.
Even if iPad sales snap back as they have in the past (and as they always seem to for the iPhone when a new iteration is launched), the trend has to leave Apple stock holders wondering two things:
Is there something fundamentally, competitively wrong with the iPad?
And if so, can it be fixed?
iPad Impediments
To give credit where it’s due, Apple largely established and defined the tablet space when it debuted the first iPad in 2010. And it’s still the market share leader by brand. Apple owned 36% of the tablet market in 2013, and still owns a comparable portion of the market — two-thirds of tablets sold run Google’s (GOOG) Android, sure, but that’s across multiple manufacturers. Only Apple makes iOS-powered iPads.
So why are iPad sales declining?
Realistically, it’s a combination of factors, one of which is sheer slowing growth of the global tablet market. Gartner forecasts that tablet sales will increase by “only” 24% this year, versus a 68% growth rate in 2013. That’s still growth, but the more the market matures, the more competition can chip away at the iPad’s market dominance.
Another reason: While iPads are portable and fun, and make games and Facebook readily accessible, they can cost more than a low-end computer system — and still do less than a typical computer system. Sometimes it’s not about portability, as some consumers have decided after the manic stage of the product’s lifecycle died down.
Yet another potential reason iPad sales are struggling is, their superior quality makes them last longer, and the performance of even an older iPad can still be just as solid as that of a new Android tablet. Andreessen Howowitz’s Benedict Evans says the average iPad is used for a couple of years, versus a lifespan of only about a year for an Android machine.
The biggest impediment of all for the iPad, however, might be its more popular brother: the iPhone.
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In 2010, iPads were new, and the iPhone at the time was a fourth-generation product. It was conceivable that many consumers willing to consider any Apple product chose the iPad rather than an iPhone, noticing the two products were still distinct. Four years, two phones and three iPads later though, much of the difference between an iPad and an iPhone has narrowed.
More than that, in 2010, there were an estimated 62.6 million smartphone users in the U.S. alone. By 2013, the total was 144.5 million. That vast increase in smartphone ownership might have taken millions of consumers out of the pool of people who would have otherwise been interested in purchasing an iPad.
Can AAPL Fix Its iPad Sales Problem?
Just for the sake of argument, let’s assume Evans’ data suggesting the quality of the iPad is “too good for its own good” isn’t the bulk of the challenge at hand. Rather, let’s assume the reason the iPad is hitting a roadblock is some combination of a tough-to-justify price, cannibalization by the iPhone, and of course, competition. Is there anything Apple can do that would ease the worries of Apple stock holders seeing the iPad sales struggle?
Yes. Apple could lower the price, improve the product and accept weaker margins.
That’s not an Apple-like response though, nor should it be.
One of the best assets Apple owns isn’t one found on a balance sheet. It’s the market’s perception that it makes premium products that command premium prices. It would be wiser for the company to continue to make the iPad for what it knows to be a limited market than to mar the brand name and risk injuring iPhone or Mac sales too.
And yes, it can afford to do so — iPad sales only account for a small portion of Apple’s total revenue. The iPhone wins the lion’s share of the company’s income, and there’s little doubt Apple still is the name to beat in the smartphone race.
That being said, the company may have just quietly taken the one big step it could afford to take in an effort to rekindle iPad sales.
It’s an interesting juxtaposition to see Apple partnering with International Business Machines (IBM) — the company that ultimately led the charge against Macs and Apple for years — to build apps that make the iPad a more potent at-work machine. Yet, this is exactly what was announced late last month.
In some ways, it acknowledges that an iPad can’t currently replace an actual PC, but might be able to do so with the right tweak. A budding partnership with what used to be a distinctly anti-Apple organization, however, might also be a model for similar partnerships that close the gap between a PC and a tablet.
Bottom Line
Investors concerned about the impact of weak iPad sales on Apple stock need not worry too much. Sales of all the company’s products ebb and flow, and although the iPad slump has been oddly troubling, AAPL has a habit of growing right through its impasses.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
