Small Tablets Are Still the Big Trend

The tablet world is still evolving, but instead moving in a bigger and better direction, it's trending toward smaller and better. Apple (NASDAQ: AAPL  )  and Amazon.com are in the best position to benefit from smaller tablets, while Microsoft (NASDAQ: MSFT  ) unsurprising looks like it will miss out, at least for now.

All signs point to smaller
New research data released by Gartner shows that tablet shipments are expected to grow by 42.7% this year, and that consumers are still trending toward smaller tablets. In its report, the company said, "Continuing on the trend we saw last year, we expect this holiday season to be all about smaller tablets as even the long-term holiday favorite -- the smartphone -- loses its appeal."

So why are Apple and Amazon in the best position to benefit this season? It's partly because Amazon just refreshed its Kindle Fire line and Apple is expected to do the same to its iPads on Tuesday.

The new Kindle Fire tablets sell in 7-inch and 8.9-inch models -- right around the Gartner's sweet spot of 8 inches or less -- and have the new Qualcomm Snapdragon 800 processors and 11 hours of battery life. The Kindle Fire has been a solid contender in the U.S. market, selling an estimated 11.8 million tablets last year, and is projected to sell more than 10 million this year. That estimated decline might come as Apple's gain.

As you can see from the graph below, Apple's iPad sales typically spike during the holiday season:


Source: Apple SEC filings.

This trend is likely to continue for Apple this year, with the company's iPad refresh slated for tomorrow. The Wall Street Journal has reported Apple will introduce a Retina display iPad Mini, which could boost sales even more as customers have put off purchasing an iPad until the update. In the third quarter ending in June, iPad sales were down 27% year-over-over, making tomorrow's event an important one for Apple.

Aside from the Amazon and Apple refreshes, investors should also take note of Microsoft's absence from the small tablet market. When Microsoft refreshed its Surface line last month, it notably left out a small-tablet version. Microsoft is still trying to build up the Surface brand, so introducing a new product may not have been the best time. But with consumers already confused about which Surface version is right for them, a Surface Mini would have at least communicated to consumers that the smaller device was for consuming content and not for producing it.

Microsoft is missing out on the small-tablet trend, and by the time it releases such a device, the majority of growth in the market may already be gone.

It's important for investors to consider the magnitude of tablet trends, but also how quickly they can change. This year small tablets will drive sales, and that may last for another year or two. But as PC sales drop off, consumers will need devices that provide the same level of productivity while remaining portable. That's why I believe the case for an iPad hybrid is building. But for now, Apple seems to be a in a good position to benefit from small-tablet growth, and though competitors like Samsung are increasingly squeezing Apple's tablet market share, the latest iPad Mini refresh should help push back against the growing competition.

Apple might start from scratch
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