No One Appreciates Apple's iPad

Apple (NASDAQ: AAPL  ) investors tend to focus singularly on the iPhone, and for good reason, as the high-margin device remains the bulk of the business for now. Shares are down over 35% from all-time highs, largely on fears of saturation within the high-end smartphone market slowing down the iPhone's growth prospects.

Judging by how investors are currently valuing Apple, it's almost as if no one appreciates the iPad anymore.

Plenty to go around
Even as the iPhone business matures and growth decelerates, the iPad still has massive opportunities ahead of it, as the broader tablet market remains nascent. The only meaningful success that rivals have had thus far is in the low-end, most notably Amazon.com's Kindle Fire and Google's Nexus 7. Both of those devices sell at cost in order to further the e-tail giant's and search titan's goals of driving content sales and search traffic, respectively.

Microsoft (NASDAQ: MSFT  ) is jumping in with its Surface tablet, but as expected, it didn't report Surface unit sales when it released earnings last night. Surface RT is trying to compete with the iPad directly at the $499 price point, something no rival has done successfully to date.

Still, even if rivals begin to gain traction in market share, which is inevitable considering how much the tablet market is expected to grow over the years, Apple's potential is incredible.

The iPad alone will soon be bigger than all of Intel
Market researcher IDC recently boosted its forecasts on where the tablet market is heading, with worldwide shipments in 2013 expected to be 172.4 million, reaching 282.7 million by 2016. Apple is expected to grab half of those units and grow at a compound annual growth rate of 21%. IDC also expects Android to grab 40% of 2016 shipments, with Windows coming in No. 3 with 10% share that year.

That represents 86.2 million iPads in 2013, and 141.4 million iPads in 2016. Those are massive numbers for one company to ship. For context, here are Apple's iPad shipments over the past three years.

Source: Earnings releases. Calendar quarters shown. CY = calendar year. M = million.

iPad average selling prices have declined from $582 in 2011 to $500 in 2012, in part due to the introduction of the iPad Mini and continued sales of the iPad 2 at the $399 price point. As consumer demand shifts toward the smaller form factor, ASPs will likely continue declining while unit shipments rise. iPad ASP in the most recent quarter was $467, but even if we use a conservative ASP of $400, we're still talking about $56.5 billion in iPad revenue in 2016.

That's more revenue than all of Apple generated in the fourth quarter and also more than many entire companies generate annually. That's more than the $48 billion in revenue that Amazon generated and $53 billion in sales that Intel (NASDAQ: INTC  )  cleared in 2012. Intel's 2013 guidance calls for low single-digit revenue gains, after posting a slight top-line decline in 2012. Assuming Intel only grows in low single-digits for a few years (a safe assumption considering the current state of the PC market), it's entirely conceivable that the iPad will actually overtake Intel in revenue in the near future.

The iPad alone is already bigger than Windows
With Microsoft reporting its latest figures last night, we can compare iPad revenue against its Windows division. The Windows business is one of Microsoft's three biggest segments, contributing over 40% of the quarter's operating income, and has been around for almost three decades. This is also the operating system that powers 92% of the world's PCs.

iPad revenue surpassed it early last year.

Source: SEC filings. Calendar quarters shown.

Apple's fledgling tablet business now generates 80% more revenue than Microsoft's flagship product, less than three years after the device was introduced.

Diversify, diversify, diversify
The iPad will also help diversify Apple's business and reduce its reliance on the iPhone, although iPhone sales will always be critical. More importantly, the iPhone business is heavily reliant on carrier subsidies, which is a risk in itself, as wireless carriers stand between Apple and consumers.

The tablet market is an unsubsidized market where Apple sells directly to consumers. Even cellular-equipped iPads are sold unsubsidized with a la carte data packages, relegating carriers to commoditized service providers. This reduces the risk of possible subsidy reductions, since carriers have their own bottom lines to protect. 

The ramp up to global tablet adoption will be long and profitable for Apple. Investors need to appreciate the iPad opportunity more.

As traders dump their Apple shares en masse, will you have the resolve to hold your ground -- or possibly buy more? Emotions aside, Apple's growth story is far from over, and it still has massive opportunities ahead. We've outlined them right here in The Motley Fool's premium Apple research service, and it may give you the courage to be greedy when others are fearful. If you're looking for some guidance on Apple's prospects, get started by clicking here.

 

Read/Post Comments (6) | Recommend This Article (12)

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 January 25, 2013, at 8:27 PM, TEBuddy wrote:

    What a terrible comparison. Apple is an OEM and retailer. Windows is just an Operating System. How about comparing the revenue of the MacOs or iOS alone to Windows. What portion of Apples profits are related to the Operating System?

  • Report this Comment On January 25, 2013, at 8:33 PM, TEBuddy wrote:

    I also think these estimates are wrong. There is nothing to say the number of drones that purchase Apple products will continue to grow. When there are better products available, the iPad will not necessarily grow in sales, in fact they may not even maintain, which is more likely. The x86 tablets will likely to take a lot more of the market than they are "estimating". Businesses will use Windows compatable hardware to run all of the software they have purchased and approved to run on their computers connected to their networks. That and users that want to do more with their tablet, like those without a notebook.

  • Report this Comment On January 25, 2013, at 10:09 PM, alboy5 wrote:

    There are high quality much less expensive phones, tablets and pcs than aapl.

    The appl fad had to end sometime. Its end could only be accelerated by inept management. I wonder what Siri would say, 'Where is Steve Jobs, when I need him.'

  • Report this Comment On January 25, 2013, at 11:38 PM, nanarchy wrote:

    What a terrible Article. You can't compare hardware sales vs software sales, it is an idiotic comparison. Hardware will always be a much higher revenue number but also much lower margin. Apple products are also unlikely to continue to grow, why buy an ipad or iphone when their are better quality cheaper options, Apple have relied solely on consumer sentiment and FAD and that is now slowly ebbing away.

  • Report this Comment On January 28, 2013, at 7:13 AM, Melci wrote:

    TEbuddy, allboy5 and nanarchly, you guys crack me up.

    You guys are so keen to see Apple fail that you can't see the truth in front of your eyes.

    Look at those graphs again. Are those trend lines trending towards failure? Of course they are not. Apple is the only company actually making a decent profit in both the smartphone and tablet spaces and the only company with an ecosystem that is actually rewarding 3rd party app developers, advertisers, content providers, etc at a sig officiant level.

    The continuing success of the iPad against even tablets sold so much cheaper below cost is astounding. The iPad mini at launch sold more in 3 days than Amazon and Google sold of the Kindle fire and Nexus 7 in 3 entire months. This is not a tablet on its way out.

    Apple is still a juggernaut and the iPhone and the iPad are still growing at an enormous rate every year despite growing competition as the graphs above show.

    The iOS ecosystem continues to completely dominate Android in all the metrics that matter (80% manufacturer profitshare, 88% e-commerce revenue, 84% games industry revenue, 67% advertiser revenue, 60-70% web share, etc etc ettc. and is well and truly here for the long term.

  • Report this Comment On April 05, 2013, at 11:06 PM, ranchrfl wrote:

    Just returned from a 5-week trip (land and cruise) around South America. On the ship loads of people were using their iPads to record photos and video, something I hadn't thought of but started doing at Cape Horn. Great pictures and video. Stopped using my camera. And, by the way, there must have been a couple droid cams but I didn't see any but loads of iPads. Keep praying droid fans:)

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