Apple's New iPad May Not Be as Profitable As You Think

Much has been made about Apple's (NASDAQ: AAPL  ) new 128-gigabyte Retina iPad. Priced expensively at $799 for the Wi-Fi only edition -- most PCs can be had for a similar price -- the new tablet promises a needed boost to the Mac maker's margins.

Or at least that's the prevailing wisdom. The math says otherwise.

According to researcher IHS, which revealed its findings to CNET, Apple pays about $0.55 per GB of iPad storage. Thus, the jump from 16 to 32 GB costs the company just $8.80 while producing $100 in additional revenue -- an astounding 91.2% margin. By contrast, the jump from 64 to 128 gigs costs $35.20 while offering the same $100 revenue boost, but at a much lower margin.


Source:  The Motley Fool.

Ironic, right? The high-end iPad could actually crimp margins if it cannibalizes sales of entry-level iPads.

Fortunately, that's unlikely to happen. Initial demand for Apple's 128-GB iPad appears confined to business users who pay for expensive carrier data plans -- specifically, Sprint Nextel and Verizon customers. Those who order now won't see their iPads ship for three to five days vs. one to three days for the Wi-Fi version.

Perhaps these shoppers see the new iPad as a laptop replacement? A recent Forrester Research survey found surprising demand for Microsoft's (NASDAQ: MSFT  ) new Windows 8 tablet, which, with its snap-on keyboard, pitches itself as a laptop alternative.

Whatever the draw, the newest iPad seems destined to serve a niche buyer base. Apple isn't used to that. Or at least not this Apple, whose premium products have gone mainstream in the same way that Starbucks has made the $3 cup of coffee an everyday must.

The iEmpire is changing. What that means is a question we don't yet have the answer to. But we do have some clues as to whether Apple remains a buy at current prices, says Eric Bleeker, The Motley Fool's senior technology analyst and managing bureau chief. He's prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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Comments from our Foolish Readers

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  • Report this Comment On February 06, 2013, at 9:14 PM, H3D wrote:

    Untrue since pricing the 64G upgrade to 128G implies that the 16 to 32G and 32 to 64G upgrades are already in place and while the margin on each step may be lower than the step before, it is still higher than on the overall product at the previous memory step, and hence will increase the margin on the overall product.

    Nice try. No Banana.

    Wise up or cut the FUDS

  • Report this Comment On February 07, 2013, at 1:08 AM, Gary03mw wrote:

    Jesus, this can't be serious. I've read some really shortsighted and bad articles on Apple but this one takes the cake.

    A 16 GB iPad costs $499. The flash storage costs Apple about $16.

    A 32 GB iPad costs $599. The flash storage costs Apple about $32. If a customer chooses this option Apple is making an additional $84 over the 16GB option.

    A 64 GB iPad costs $699. The flash storage costs Apple about $66. If a customer chooses this option Apple is making an additional $134 over the 16GB option and an additional $50 over the 32GB option.

    A 128 GB iPad costs $799. The flash storage costs Apple about $132. If a customer chooses this option then Apple is making an additional $168 over the 16GB option, an additional $84 over the 32GB option, and an additional $34 over the 64GB option.

    The margins on the 128 GB iPad will be significantly higher than the lower versions. I can't believe such a simple concept was missed.

  • Report this Comment On February 07, 2013, at 1:44 AM, HiramWalker wrote:

    Math impaired FUDster.

  • Report this Comment On February 07, 2013, at 4:00 AM, st0815 wrote:

    Margin for the overall device goes down, if the component you add has a lower margin than the device had before. That's not the case here, hence overall margin will rise.

    Apart from that though: margin is nice, but profit is better. Even if margin were to slightly drop you'd still add $65 in profit on every sale.

  • Report this Comment On February 07, 2013, at 9:04 AM, TMFMileHigh wrote:

    'Morning everyone,

    Thanks for the comments and corrections. You're right: the overall profit gain going from 16 GB to 128 GB would be significant.

    What I wonder is how many customers will decide they need 128 GB?

    FWIW and Foolish best,

    Tim

    --

    TMFMileHigh

    @milehighfool on Twitter

    http://timbeyers.me

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