Apple Inc. (NASDAQ:AAPL) delivered better-than-expected Q3 earnings yesterday. While iPhone sales that didn’t fade in advance of iPhone 8 expectations and a 50% boost in Apple Watch sales were a big part of that, the real standout of the quarter was the iPad. AAPL stock is up more than 6% this morning in pre-market trading.
After 13 straight quarters where iPad sales have declined year-over-year, AAPL broke the losing streak yesterday — and in a big way. Fueled by the new $329 iPad and new iPad Pros released this year, iPad sales were up 15% compared to Q3 2016, and 28% over last quarter.
And that’s good news for AAPL stock.
AAPL Books Impressive iPad sales
One of the highlights of Apple’s impressive Q3 2017 earnings is the turnaround in iPad sales. With more than 11.4 million sold, that’s an increase of 15% year-over-year. It’s also a 28% improvement over Q2 2017.
Apple refreshed its iPad lineup this year and made a key strategy shift. On the pro-sumer side, the 12.9-inch iPad Pro was updated and at WWDC 2017, the company introduced an all-new 10.5-inch iPad Pro.
That new iPad Pro in particular had the potential to kickstart the segment because it offered a larger display than the model it replaced (big enough to support a full-sized keyboard attachment) while staying roughly the same physical size.
At $649, the new iPad Pro has a significant price advantage over Microsoft Corporation’s (NASDAQ:MSFT) Surface Pro, which starts at $799. But with a 10.5-inch display, the new iPad Pro is still physically large enough for professional use — something that couldn’t necessarily be said about the 9.7-inch model it replaced — yet still more portable than Microsoft’s offering.
Even more important was a strategic shift by AAPL — the Cupertino, Calif. company relented on its consumer iPad approach and in March released a new model that replaces the iPad Air 2 in its line-up. However, AAPL abandoned its “thinner, better in every way and $499” approach.
The new iPad is the same 9.7-inch form factor as the previous model. It gets a faster, upgraded CPU, but doesn’t get any slimmer and lacks some of the cutting-edge display technology the iPad Air 2 featured. And rather than the $499 the company has traditionally charged for a new model, the new iPad launched at a low $329 in an attempt to convince long-time holdouts to upgrade.
These moves clearly worked, with iPad sales rebounding in a big way.
Healthy iPad Sales are Good for AAPL Stock
Everyone knows that AAPL stock is driven by iPhone sales. But it’s important for the company to have other significant sources of revenue. After its introduction in 2010, the iPad quickly became a second major pillar for Apple. At the peak of its popularity in Q3 2102, iPad sales hit 17 million and accounted for 26% of Apple revenue.
It was downhill from there and starting in 2014, AAPL booked 13 straight quarters of declining iPad sales.
AAPL has tweaked the formula many times since then, including releasing the iPad Mini and introducing iPad Pro models. The Q3 2017 numbers — showing not just increased iPad sales, but double-digit growth in the product — show that Apple appears to have finally hit upon a winning formula.
The iPad may never return to the point where accounts for a quarter of Apple revenue, especially when the popular new iPad sells for $329 instead of the old $499 starting price. But stronger iPad sales take some of the pressure off the iPhone, they help to drive the increasingly important Services revenue as buyers stock up on apps, and buying an iPad helps to lock a consumer into the Apple ecosystem — making it more likely they’ll also buy an iPhone, an Apple Watch and maybe a Mac as well.
In other words, strong iPad sales are good for AAPL stock, so Apple investors should be pretty pleased with the 11.4 million iPads Apple sold last quarter.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
