Are Tablets Really a Tech Revolution?

In a corresponding article published today (you can read it here), I explored the disconnect that's developed over the past few months between the widely watched Philadelphia Semiconductor Index and various mobile markets. A few mobile-focused areas, such as radio-frequency companies, are struggling, but no area looks as deflated as tablets do right now.

The following chart shows a comparison of the Philadelphia index to both a host of RF companies, and also NVIDIA (Nasdaq: NVDA  ) , a company that has emerged as the early leader providing tablet processors.  

 

As you can see, NVIDIA's pulling along at the bottom of the group, having fallen by about 32% since Feb. 18 before rebounding in the past week.

Becoming a tablet powerhouse
Although trying to precisely read Mr. Market's mind is an exercise in futility, there's little doubt that a glut of lackluster tablet news is weighing down NVIDIA's share price. The company, which has long been known for its expertise in graphics cards, made a strategic shift to mobile processors in 2008. NVIDIA struggled to break into the smartphone market, but it struck gold in tablets. As companies have raced to produce their own tablets, NVIDIA has scored a series of design wins across a host of major manufacturers. Asus, Acer, Dell (Nasdaq: DELL  ) , LG, Motorola Mobility (NYSE: MMI  ) , and Samsung are all using NVIDIA's Tegra or have announced that they'll be using it in heavily promoted upcoming tablets.

A revolutionary opportunity … for some
The big problem is that tablets that don't have a giant apple emblazoned on their backs aren't selling. Well, they're selling, but not briskly enough. This state of events has been pressuring more than NVIDIA. At the turn of the year, the annual Consumer Electronics Show was a veritable Tabletpalooza; it seemed every manufacturer was turning to tablets in a big way.

That sparked quite a bit of hope for companies such as Motorola, Research In Motion (Nasdaq: RIMM  ) , and HTC. If tablets were the next major growth opportunity, it could mean a fundamental restructuring of the landscape for computer manufacturers. Mobile companies have made occasional attempts to establish a foothold in the PC industry, but they've largely been unsuccessful -- see Nokia's ill-fated attempt at selling a netbook.

However, tablets share more in common with smartphones than they do with PCs, thanks to their inclusion of many of the same components that mobile companies already procure, as well as a very similar design. Not only that, but if tablets with 3G and 4G connections to wireless companies gained popularity, that would mean tablets would be sold at the same outlets (e.g., Verizon and Sprint) that companies such as Motorola and HTC already had an established presence in. If tablets could take even 25% of the PC share, it would be a potential coup for mobile companies and a body blow to existing PC vendors such as Acer, Dell, and Hewlett-Packard (NYSE: HPQ  ) .

The downside
Of course, as with any much hyped game-changing technology, tablet expectations got ahead of themselves. After a strong showing at CES pushed it to new highs, Motorola Mobility's share price has fallen by 29% as its Xoom tablet was reported to have a rocky launch. Excitement around the company has fallen from giddiness to having an analyst outright questioning the company's "survivability" ahead of earnings last week. Ouch.

Partially, investors have had to reorient their expectations surrounding tablets. For one thing, Google's (Nasdaq: GOOG  ) Honeycomb version of Android that's optimized for tablets is still a work in progress. This is Google's first crack at adapting Android to the different needs of tablet users, and it's only natural that there'd be some kinks in first-generation Honeycomb tablets. Second, sales figures may not be as booming as initially expected. Even mighty Apple (Nasdaq: AAPL  ) missed on iPad sales expectations last quarter: It sold 4.7 million iPads, while Wall Street was expecting the company to move 6.3 million.

You call this a revolution?
I'm not overly concerned with Apple's sales figures. The company launched the iPad 2 at the end of the quarter, and I'll be more inclined to assess the iPad's strength next quarter, when consumers aren't waiting on a refreshed model and the supply constrains seen at the time of launch have abated.

As for Android, we saw Google stumble out of the gate in smartphones as well. It wasn't until the launch of the Droid phone that the platform really took off. It's much the same with tablets: It'll take some time to get going, and initial troubles are to be expected.

However, that's not necessarily a good thing for investors banking on tablets as a central growth driver for companies such as Motorola or HTC. As Android finds its tablet sea legs, Apple will continue building up a more powerful content ecosystem. More importantly, Apple's massive buying power -- which lowers its component costs -- has allowed it to price the iPad at a surprisingly aggressive point. At a $500 entry tablet price, Apple has managed to maintain respectable gross margins while competitors struggle to turn a profit. As frustration matching Apple's pricing mounts, it's a given that the massive ranks of "me-too" tablet manufacturers will thin out.

Final thoughts
The big thing to keep in mind is that for most of the companies I've mentioned here, tablets aren't revolutionary, at least not to the extent that smartphones were. For each set of companies, there are instead varying levels of impact on their business:

  • If you're an Apple investor, the growth of tablets is definitely a central theme to the company's ability to keep growing. Give the company a pass for last quarter's iPad sales, but watch them more closely in the current quarter's results.
  • If you're an investor in mobile-focused companies such as Research In Motion or Motorola, don't get too aggressive about baking tablet sales into future projections. For the foreseeable future, smartphones will drive these companies' growth. Think of tablets as a valuable "call option" that has little current value but could drive outsized returns if conditions change.
  • If you're invested in companies such as Hewlett-Packard or Dell, tracking cannibalization trends is important. If tablet sales stay lower and are largely incremental to PC purchases, they won't help the business, but the damage won't be as much as currently expected, either.
  • If you own NVIDIA, watching tablet sales is very important. Even if current-generation sales disappoint, we're in the early innings of a long game. More importantly, it appears that the company has positioned its next-generation Tegra chip in a good spot to dominate the next holiday refresh cycle of tablets. With a more-polished Honeycomb surely released by then and tablet manufacturers releasing a second wave of designs, the holiday season into early next year will give a much better picture of how large the overall tablet opportunity is.

If you want to keep following tablet development across the year, make sure to add any of the companies discussed her to our free My Watchlist service, which provides updates on all your favorite companies.

Eric Bleeker owns shares of NVIDIA. Google is a recommendation of Motley Fool Inside Value and Motley Fool Rule Breakers. Apple and NVIDIA are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on Apple and writing puts on NVIDIA. The Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (12)

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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 May 01, 2011, at 4:24 PM, xmmj wrote:

    "This is Google's first crack at adapting Android to the different needs of tablet users, and it's only natural that there'd be some kinks in first-generation Honeycomb tablets"

    No one had to say that about iOS4.2 Apple's "first crack" at a tablet OS. It is not that it is first crack - it is that Google is willing to ship beta-ware (even alpha-ware?) as production software, and let the customers do the testing for them.

    "If you're invested in companies such as Hewlett-Packard or Dell, tracking cannibalization trends is important. If tablet sales stay lower and are largely incremental to PC purchases, they won't help the business, but the damage won't be as much as currently expected, either."

    On the other hand - if tablet PCs DO take off, then HP and Dell have real problems. HP less so since their Web OS has a better chance of being a quality release than Honeycomb apparently was.

  • Report this Comment On May 01, 2011, at 5:42 PM, TMFRhino wrote:

    xmmj,

    Re: Honeycomb. I think that's a fair point. Definitely a different design philosophy than Apple, and might have been a little too aggressive with the roll out. Will be interesting to see how tablet market share shakes out in the next year. I'd expect Apple to hold 60-70% in 2011, but we'll see.

    Re: HPQ/Dell. I'd completely agree with that. Although, as you alluded to, would hurt Dell more. HPQ's fairly diversified away from its PC business and low or negative PC growth wouldn't have the same outsized effect.

    Thanks for the comment!

    -Eric

  • Report this Comment On May 01, 2011, at 7:38 PM, marv08 wrote:

    "…NVIDIA, a company that has emerged as the early leader providing tablet processors."

    That one is a bit misleading... What is really on the market (and serious, e.g. I consider the Dell and Viewsonic attempts at tablets mere jokes)? Apple with approx. 70-75% share (could be more, if they could make more)... not using NVIDIA. The Playbook, widely expected to capture 4-6% of the market... not using NVIDIA. That's roughly 80%+ not using the "early leader". 20% max. is not really a huge lead?!

    From an investment point, it is maybe too early to really "get" the situation. Apple (and its suppliers) are maybe the only companies making any profits with tablets right now - they benefit from the economies of scale, they basically "own" most critical components (panels, panels and panels) and they have established the maximum prices one can ask for any tablet.

    All competitors have been deemed "too expensive" right out the door, while using much lower quality components in some cases (e.g. the Xoom uses a poor TN-panel and is still more expensive than the iPad 2 which uses a state-of-the-art IPS panel). To meet consumer expectations, the price has to go down, or the quality has to go up. A risky bet for companies like Motorola, especially as they have to rely on Google to make the most important component (the OS) better for free, while awaiting to be sued into oblivion by Oracle. Fact is: 2011 is almost over for Apple's competitors, and so far, they do not impress at all.

  • Report this Comment On May 01, 2011, at 10:36 PM, rlcato wrote:

    "It sold 4.7 million iPads, while Wall Street was expecting the company to move 6.3 million."

    And that was due to Apple not being able to produce them fast enough.

  • Report this Comment On May 02, 2011, at 1:34 AM, rav55 wrote:

    How are Tablets a tech revolution?

    They were invented 45 years ago by Gene Roddenbury and used on Star Trek. What is revolutionary is we have finally developed cpu that performs low enough not to drain the battery in a few hours!

  • Report this Comment On May 02, 2011, at 1:49 AM, beetlebug62 wrote:

    One, Apple sold 5.1M iPads, not 4.7M. 4.7M was the "shipped" number. Channel inventory decreased 400k.

    Two, why is Google given a pass on its Android tablet software? Why are you assuming that the company of the perpetual beta will get Honeycomb right? Isn't that a risk that OEMs that use Android should be concerned with?

    Three, about cannibalization, why no mention of the metric we already have? Netbook OS shipments down 40%.

    Four, how did you come up with your 60-70% iPad share? Are you talking shipments or sales? Remember, all those other mfrs like RIM, Motorola, etc., are coming to market this year, meaning they have to fill channel inventory, so shipments this year will be significantly different than actual sales. It's now May, 1/3rd of the year is gone, and Xooms, Playbooks and Tabs are not shipping in any significant numbers. How are they to get 30 to 40% of this market? Higher if that's what they are to average, seeing as there is only 2/3rd left of the year.

  • Report this Comment On May 02, 2011, at 10:26 AM, alexmd2 wrote:

    Android is going to dominate tablet market, it is just a question of time. Will it be power by NVDA Tegra 3 is to be seen. Quandcores are going to hit the markeet this fall with support for full 1080p and more resolution. Hexacores are in the pipeline for the next year and octacored for 2012. Apple stands no chance against the rest of the world. IPad's marker share will start to go down in August 2011. My friends are already upgrading to Asus eee pad, which is going for less then $400 and has mSD card slot (unlimited memory for content). Amazon cloud is going strong on tablets - say buy to iTunes. AAPL needs to constantly invent new staff to stay on the ball. Google just needs to copy it and make it free for all to use - simple. AAPL can't win in a long run.

  • Report this Comment On May 02, 2011, at 10:29 AM, alexmd2 wrote:

    http://www.amazon.com/Transformer-TF101-A1-10-1-Inch-Tablet-...

    This is the best tablet on the market now.

  • Report this Comment On May 02, 2011, at 5:45 PM, Henry3Dogg wrote:

    @rav55

    "How are Tablets a tech revolution? They were invented 45 years ago by Gene Roddenbury and used on Star Trek."

    So there's no point in me inventing A warp drive, or a teleportation machine. Gene Roddenbury has already done it. Duhh!

  • Report this Comment On May 03, 2011, at 6:13 AM, marc5477 wrote:

    Average people dont really want a tablet. It doesnt offer enough usability for the price.

    The problem with comparing Apple with everyone else is that the Apple customer is buying their stuff because they want to be hip. Those people will always buy apple products no matter what. Performance or anything else does not matter. They want to be cool and part of the crowd and Apple is milking that market to death just like mass media milks their viewers with reality tv and paris hilton shenanigans. Apple is a totally different market and customer.

    The truth is, most people dont want a tablet for more than about $200-$300 when they have a fully functional notebook or desktop. The problem with the current $200 tablets is that they are not very good nor are they convenient for typing unless you plug in a keyboard which negates their design. So we have a situation where the right product simply doesnt exist. For now, tablets will only be supplements to the desktop or notebook.

  • Report this Comment On May 07, 2011, at 3:05 PM, Jerrygecko123 wrote:

    @marc5477;

    "the Apple customer is buying their stuff because they want to be hip","Performance or anything else does not matter." Everything from you for that matter.....

    There is not a single piece of evidence presented by you to support any assertions you offer.

    Talk about a "reality distortion field". Don't believe everything you think.

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