Apple Inc. (AAPL) stock is plunging on Wednesday after the Cupertino, California-based iPhone maker reported disappointing fiscal first quarter revenue, sold fewer iPhones than expected and guided below consensus for Q2.
The only thing that wasn’t disappointing for AAPL stock was its earnings per share numbers, which, at $3.28, barely eked by the $3.23 consensus.
Most narratives surrounding yesterday’s report focus on the rapid deceleration in iPhone sales — and rightly so, since the iPhone accounts for 68% of Apple revenues.
But Apple’s second-largest revenue earner behind the iPhone is the iPad, and that segment is experiencing an even worse slowdown.
Let’s take a look at iPad sales in Q1 2016, and see what that number tells us.
Will the iPad Ever Grow Again?
Two years ago, Apple reported Q1 2014 results. The AAPL stock price at the time was driven by both the iPad and the iPhone, and that quarter, Apple sold more iPads than it ever had — or has since.
In Q1 2014, Apple sold over 26 million iPads, hauling in revenue of $11.5 billion. At the time, that was 20% of Apple’s overall revenue. The iPhone sold 51 million units for revenue of $32.5 billion. The iPad accounted for 20% of overall AAPL revenue. The iPhone accounted for just over 56% of revenue.
Fast forward two years, and quite a lot has changed. Most notably, iPhone sales are much higher today. Last quarter, AAPL managed to move more than 74 million of them, taking in over $51 billion in revenue as a result. Meanwhile, the iPad sold just 16 million units, taking in just over $7 billion.
The iPad currently constitutes just 9.3% of Apple’s revenue stream. And with sales rapidly decreasing — iPad unit sales were down 25% year-over-year while iPad revenue was down 21% — that number will likely continue to inch lower and lower.
That’s happening for a few reasons.
Firstly, iPads tend to be more of a luxury item for consumers, and at a time when the global economy is barely growing, far fewer people are going to shell out $1,000 for another screen in their life. Smartphones, while certainly a mature market, are seen as more of a necessity, and are more frequently paid for via payment plans and monthly installments.
Second, AAPL iPads tend to last for quite a while, lengthening their upgrade cycle and putting downward pressure on repeat sales.
And of course, there’s always the competition. In the enterprise space, Microsoft Corporation (MSFT) is going after the iPad vigorously with its Microsoft Surface. The Surface also competes with the iPad in the consumer space, where the uber-low-cost Amazon.com, Inc. (AMZN) and its line of Fire tablets also wait in the wings.
With Amazon now selling 7″ Fire tablets for just $49.99, AAPL and Microsoft are fighting an uphill battle at the top price points.
Alas, AAPL stock owners desperately need CEO Tim Cook & Co. to come up with another hit product or service soon. The rapid deceleration of iPad and iPhone sales demands it, and both Apple Watch and Apple Pay aren’t successful enough to be broken out into their own reporting categories yet.
Will investors have to wait until 2019 or 2020 — the supposed release date of Apple’s electric car — for another hit product to drive growth? Who knows.
But what’s becoming clearer and clearer with every quarter is that Tim Cook is no Steve Jobs.
As of this writing, John Divine was long AAPL and AMZN. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
