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How Big Is the iPad Opportunity?

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Since the iPad's debut a little more than two months ago, shares of Apple (Nasdaq: AAPL  ) have outperformed the S&P 500 by more than 15 percentage points, making it one of the market's best stocks during an otherwise turbulent time. Can the good times continue? I think so, but it'll depend on the size of the iPad opportunity.

We don't yet know what that is, which means snarling bears are just as likely to be wrong as snorting bulls. So let's focus on what we know:

  • More than 2 million iPads have been sold.
  • The iPad sells for between $499 and $829, before service plans or other add-ons.

Multiplying 2 million by $664 (the average of those pricing extremes) tells us that Apple has already booked at least $1.3 billion in iPad revenue. That's a good number, but we know from Apple's second-quarter conference call that the iPad is partially responsible for a coming decline in gross margin.

We also know that there's bound to be plenty of competition. Now that Apple is making its own chip for mobile devices, Intel (Nasdaq: INTC  ) is making a play to get its newest Atom chip adopted by netbook makers.

Dell, meanwhile, has teamed with Google (Nasdaq: GOOG  ) for the new Streak tablet and Hewlett-Packard acquired Palm (Nasdaq: PALM  ) in part to use webOS as the basis for a new line of tablet PCs.

See the problem here? Apple has to move a lot of iPads to produce iPhone-sized profits, yet forthcoming competition could stunt sales.

Fortunately, the Mac maker already has experience winning in a crowded market. Consider the iPhone. Though still a relative newcomer among smartphones, it's challenging Research In Motion (Nasdaq: RIMM  ) for the market lead here in North America.

Remember also that the iPad's chief rival, Amazon's (Nasdaq: AMZN  ) Kindle, is becoming increasingly known as a store rather than a device.

Strategically, this makes sense for the e-tailer: More stores on more e-readers and smartphones should mean more e-book sales. But this also has a cost. Free consumers from the need to buy an expensive device, and chances are they won't.

Finally, entire industries are betting on the iPad. Newspapers and magazines see the device as their one chance to charge for digital content that heretofore has been free. News Corp. (Nasdaq: NWS  ) CEO Rupert Murdoch has even described the device in messianic terms.

He has good reason to believe in the device's transformative powers. ChangeWave Research recently found that iPad owners are far more likely to use the device to read newspapers and magazines than comparable e-readers.

How big is Apple's iPad opportunity? Judging from its current momentum, competitive position, and industry support, it's massive. But I could be wrong. That's why I want to hear from you.

Tell us what you think about the iPad opportunity by voting in the poll below. You can also leave a comment to explain your rationale.

Apple and Amazon are Motley Fool Stock Advisor selections. Intel is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool has a covered strangle position on Intel and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is opportunistic when it isn't feeling lethargic.

Read/Post Comments (11) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2010, at 3:38 PM, tiger132 wrote:

    As usual Apple is leading the tech field and showing the others how to produce and market innovative products.

  • Report this Comment On June 16, 2010, at 3:52 PM, lakespapa1 wrote:

    And as usual (see below) there'll be a slew of Apple-hating comments. (However, I'm with you, tiger -- I bought at 10).

  • Report this Comment On June 16, 2010, at 3:52 PM, bsimpsen wrote:

    If you can believe AT&T, pre-orders for the iPhone 4 are running 10x those of the 3GS a year ago. Given the existence of Android competitors already in the marketplace, I don't see the iPad having serious competition from other tablet makers, even next year.

  • Report this Comment On June 16, 2010, at 4:07 PM, shanghaid wrote:

    The only thing limiting Apple at the moment is it's ability to manufacture product to capture and lock in customers. Their ecosystem is strong. Given the new iPhone, and a large installed base that will upgrade over time, and the iPad, they will continue to do what they have already shown they can do. 1. Grow the market for their products. 2. Sell more to existing customers. We have seen Apple bring the iPad, iPhone/iTouch and iPAd in less than a decade. A little bit of a flop with Apple TV, but strong growth for Macs. We have to assume in the next 2-3 years one or more adjacent product opportunities will emerge.

  • Report this Comment On June 16, 2010, at 5:25 PM, gfbjohn wrote:

    All I know is that last night the Apple store was crammed w/ people looking at iPads. It was NUTS. Can't say how many were there to buy vs look, but there was huge interest.

  • Report this Comment On June 17, 2010, at 10:42 AM, beetlebug62 wrote:

    1) it wouldn't hurt if you TRIED an iPad before you did your assessment.

    2) If you look at Apple's pricing strategy for the iPad, you'd see it's a bit like the iPod touch. A potential decline in margins depend upon what device consumers choose. If it's the entry level iPad at $499, then margins are low. If it's any other model, then Apple's margins are probably healthy. We know that the 3G radio does not add $130 in cost, nor does additional ram cost $100.

    We also know that Apple has warned before about declining gross margins and they have never materialized. The last time was when Apple launched the unibody design.

    3) Intel's newest Atom chip has yet to be proven to be energy-efficient enough to compete with ARM, and other mobile chips.

    4) Dell's Streak? Can you say DJ Ditty? And, HP won't have a new WebOS device until Xmas at the earliest.

  • Report this Comment On June 17, 2010, at 5:56 PM, babysport wrote:

    Wouldn't be suprised if APPL stock rised passed Google per share by the end of this summer. APPL stock will be worth at least $640 or more per share. And by next year, 2011, APPL stock will be in the $1,000's. And in 2012, it will be in the high $2,000. And by 2013, APPL will easily reach $4,000 plus per share.

  • Report this Comment On June 17, 2010, at 7:30 PM, 1264134427 wrote:

    The ticker is AAPL not APPL and there's no way it's going to $500 or $1000 anytime soon. It will top out like google did and bounce back and forth around $3-400.

    Infothathelp: you've really been drinking the coolaid haven't you? I personally prefer gadgets not designed for a 3 yr old.

  • Report this Comment On June 18, 2010, at 10:14 AM, 1264134427 wrote:

    Have you heard these before? "Build a system that even a fool can use, and only a fool will use it" or "A Mac is like a bike with training wheels you can't remove". I would rather have complicated equipment that is versatile and configurable instead of pretty, simple equipment that is crippled and controlled in so many ways purely for financial reasons. This forum is about stocks though, so I'm not going to argue anymore about the cult of Jobs. Apple is like American TV Wrestling to me, I'll probably never fully understand it but there's lots of money to be made.

  • Report this Comment On June 20, 2010, at 1:25 AM, 1264134427 wrote:

    Your "history lesson" is partially factual, watch the movie "Pirates of Silicon Valley" it should fill in a few gaps, mistakes and assumptions you've made. I sold Apple II clone computers in the mid 1980s, Apple lost a lot of ground to IBM and PC clones around that time. The Steves weren't teen agers, they were in their 20's and it was 1976 not 1978 they built the Apple I, the Apple //c was a several years in, and the //e was more popular. IBM didn't clone any part of Apple, they're completely different CPUs and architecture unless you mean the card slots, but then you could say Apple stole the idea from Altair. Apple did steal the mouse idea from Xerox though.

    That's a pretty big leap from non-crippled cellphones to purple traffic lights. If Apple made traffic lights they'd all be the same colour, they'd just blink different speeds or something.

  • Report this Comment On June 21, 2010, at 12:12 PM, runcody98 wrote:

    All this talk about margins and no one has really nailed it on the head. Apple's margins increase every quarter because of iTunes! There is a finite margin attached to all of their hardware.

    When Steve Jobs has a keynote he always seems to mention how well iTunes is doing. With only 2 million ipad sales in 3 months and tack on 100 million ipad downloads during that period? And to turn your calculations into calculus $1 billion has been paid out to iphone developers via that 30/70 split. What did Apple take in?

    Music downloads @ $.99, iphone/ipod touch and ipad downloads have been adding up exponentially to Apple's margins. Apple hardware sales just helps itunes get deeper and robust profits! And Apple takes that to the bank every quarter.

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