Apple Could Be Heading for an iPad Holiday Blowout

Late last month, Apple (NASDAQ: AAPL  ) CEO Tim Cook stated that he had high hopes for "an iPad Christmas." He has good reason for optimism. This month, Apple has released not one, but two critically acclaimed iPads: the iPad Air, and the iPad Mini with Retina Display. Apple also dropped the price of the original iPad Mini from $329 to $299.

Apple's new iPad Air received great reviews, and early sales seem strong. Photo: Apple.

Despite all of these great things, Apple analysts are surprisingly glum in their prognostications about the iPad. Most analysts expect minimal growth for the iPad this fall, despite the double product refresh. However, the strong response to Apple's new product lineup -- especially the full-size iPad Air -- could be setting the stage for a blowout holiday quarter.

Meek expectations
In the December quarter last year, Apple sold a record 22.9 million iPads, representing nearly 50% year-over-year growth. This year, most analysts are predicting single-digit unit growth, with a few even looking for a year-over-year decline.

For example, Steve Milunovich of UBS is one of the more bullish analysts, and expects Apple to sell 25 million iPads this quarter (which he still calls a disappointment). At the other end of the spectrum, Kulbinder Garcha of Credit Suisse expects sales to drop to 21.8 million units. Ming-Chi Kuo of KGI Securities and Michael Walkley of Canaccord Genuity are in the middle, with shipment estimates of 23.1 million and 24.7 million, respectively.

It appears that one of the big reasons for analysts' low expectations is that the iPad Mini with Retina Display is supply constrained. Many analysts have stated that production problems could keep supply to as little as 2 million units for the whole quarter. Others think that Apple might be able to produce (and sell) as many as 4 million.

Overblown concerns
I'm skeptical of the most dire supply projections for the iPad Mini with Retina Display. Apple's decision to do a "soft launch" for the Mini does suggest that the supply constraints are real. On the other hand, several days after launch, the lead time for online orders in the U.S. was just one to three business days for the 16 GB and 32 GB Wi-Fi models.

The iPad Mini with Retina Display is in short supply -- but just how short? Photo: Apple.

Consider that Apple sold 3 million iPads in just three days after the fourth-generation iPad and the iPad Mini were released last year, most of which were iPad Minis. If Apple really had just 2 million units of the iPad Mini with Retina Display for this whole quarter, wait times should be expanding much more quickly.

Additionally, it is important to remember that supply constraints are nothing new for Apple. Last year, Apple managed to sell 22.9 million iPads despite significant supply constraints for the iPad Mini. Many of the 19.5 million iPads Apple sold in the March quarter went to meet pent-up demand.

iPad Air and iPad Mini will drive sales
In any case, Apple can put together a very strong "iPad Christmas," even if sales of the iPad Mini with Retina Display are severely limited by supply constraints. First, the iPad Air seems to be selling very well in its first two weeks on the market. The iPad Air already accounts for nearly 2% of all active iPads, according to Fiksu. That's a much faster adoption rate than what was seen for last year's iPad launches.

If that statistic is accurate, it suggests that around 3 million iPad Airs are already in use, and the holiday shopping season hasn't even arrived. (That also doesn't count iPads that have been shipped to retailers, or iPads that have been purchased but not used yet.) Another positive data point for iPad Air demand is that shipping times on the U.S. Apple Store have increased to five business days or more, up from 24 hours at launch.

The original iPad Mini is also likely to be a big seller this quarter. In recent years, cheaper tablets have been popular with gift-givers. The iPad Mini may have lower specifications than Apple's two new iPads, but for many people -- like my Foolish colleague Tim Beyers -- it's good enough. At its new $299 price point, the original iPad Mini could be a bigger seller this year than it was last fall (when supply constraints held back sales).

Don't count out the original iPad Mini. Photo: Apple.

The ready availability of the original iPad Mini and its lower price make it a good promotional vehicle this year. For example, Wal-Mart is offering a $100 gift card with the purchase of an iPad Mini for Black Friday, in a bid to reverse weak store traffic. That brings the effective price to just $199! This will undoubtedly be a huge sales driver.

Foolish bottom line
Apple analysts, who are expecting single-digit growth (or worse) for the iPad this quarter, are likely to get a big surprise when earnings come out in January. The strong reception of the iPad Air should boost sales of full-size iPads, while the lower price, and better availability of the iPad Mini, should make it a top holiday gift this fall.

That should be enough to overcome the supply constraints holding back sales of the iPad Mini with Retina Display. As a result, I would be surprised to see anything less than double-digit growth from the iPad product line this quarter. In fact, I think iPad sales could easily hit 30 million -- which would make Apple investors very happy campers.

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Read/Post Comments (10) | Recommend This Article (18)

Comments from our Foolish Readers

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  • Report this Comment On November 17, 2013, at 6:13 PM, Mathman6577 wrote:

    Analysts usually have been wrong (in both directions) about Apple though the years. I'm betting, like you, that they are wrong again. Apple management has usually understated what will transpire.

  • Report this Comment On November 17, 2013, at 8:08 PM, DanManners wrote:

    I just got a iPad Mini Retina delivered on Friday for my daughter for the holiday. She was excited when I told her i bought it for her. It was shipped directly from Shezen China via UPS.

    I bet they would have release the mini a week later but they rushed it due to the supply of iPad Airs running low. They may have introduced the Air which is more money first to get people to buy that instead of the mini. But after running low they started shipping right from China with the 5s.

    I believe both units will be supply constrained and they will not sell as many as people hoped for. Cook only had 1 year to bring this to market and he is not really that great at it. Samsung has 100 devices and appliances etc and they do it right. Always good supply. Apple always constrained. By the time Apple gets them they are old news by then.

    Expect more of the same as last year. Improved products same as last year. Stock went down 320 points after last years iphone5 came out and the new mini. This year it should do the same as the products are nice but the products were nice last year. I same they will do slightly better if they can improve margins. Shipping fast from China is not going to help margins.

    I see Apple breaking below 500 before earnings and after a miss the stock will head back down to the 440 level. I hope the buybacks keep it from going below 400 again.

    They beat top and bottom in Oct 2013. The stock went down. What would have happened if they missed? Ouch.

    Cook has to go and that is why the stock will always lag. He is a disaster. Putting out that maps program last year without testing it was the biggest blunder i have ever seen.

    Cook is arrogant! Ask yourself what would Apple stock do if Elron Musk became CEO. Soar.

    Cook must get canned to see Apple head higher. There is no China Mobile deal. No big Phone. No TV. No watch. Not anything new. What is new is they said 2013. Then 2014. Now the tv is 2015. Why not just say 2050? Because it is the same thing. Cook will never come out with anything new. It is just too much for him. Mr. Peter Principle needs to get fired today.

  • Report this Comment On November 18, 2013, at 12:23 AM, JaredPorter wrote:

    @ Dan (lack of) Manners. Tim Cook is ANYTHING but arrogant! He's got the toughest job in American business, inheriting the reigns of the nation's (often) biggest company and following the canonized Steve Jobs who was not only a legend, but Apple's principal founder, immediately following the introduction two game changing tech winners (the iPhone and iPad).

    Did you know that the iPad is the biggest selling tablet in China at the moment? Did you know that the iPhone was up about 12% in sales last quarter yoy even though the new phones were only out for ten days? Did you know the iPhone is taking the largest share of business in Japan now? Did you know that China Mobile is probably waiting until they get more of their 4G infrastructure up and running before their business partnership with Apple is announced? Did you know that with Apple's new product rollouts this Season, Apple will like enjoy their biggest quarter ever? I find your criticism rather odd inasmuch as your daughter is one who seems to be thrilled with her new iPad??? Neither Tim Cook nor Steve Jobs can control the price of Apple Stock. All they can do is run the greatest business America has seen in modern times (against one of the biggest orchestration of "nay-sayers" and know-nothing set of hit-whore pundits in the history of "business reporting".)

  • Report this Comment On November 18, 2013, at 8:41 AM, pondee619 wrote:

    "It appears that one of the big reasons for analysts' low expectations is that the iPad Mini with Retina Display is supply constrained."

    I am confused by the above statement. How many iPad Minis with Retina Display does Apple have in stock? How many have been shipped, how many are ready for immediate shiping? How long does it take to make it? Christmas is only 5 weeks away. Apple either has the finished goods and has shipped most of them by now, no? Shouldn't someone, APPLE, know how many they have to sell this holiday season with only 5 weeks left to go?

  • Report this Comment On November 18, 2013, at 6:58 PM, Manchini wrote:

    Don't be confused, pondee619:

    APPLE knows - ANALYSTS don't.

  • Report this Comment On November 19, 2013, at 9:41 AM, jlssmith wrote:

    Apple uses artificially induced supply constraints as a marketing tool. Perceived scarcity leads consumers to purchase faster than they would otherwise. Watch the ridiculous theater of lines outside Apple retail locations…

  • Report this Comment On November 19, 2013, at 12:00 PM, TMFGemHunter wrote:

    @pondee619: It's not public knowledge, but I'm sure Apple has a pretty good sense of how many it has on hand and how many it can make. It probably takes 2-3 weeks from receiving components to getting to the point of sale or end-user. So there is still some variability in what is available by December 24 based on how fast production/yield rates are improving.

    I think it's safe to say that Apple is express shipping iPads for the holiday season, so it could theoretically have shipments leaving the factories as late as the third week of December and making it to consumers for Christmas.

    @jlssmith: I really don't think Apple artificially induces supply constraints. It would be a terrible business move, because any buzz factor is offset by the loss of customers who are unhappy when they can't get the device. But there's a balancing act between building up 10s of millions of units of inventory before having an on-sale date versus putting it on sale earlier in the production run in order to speed time-to-market. It's also useful to know what configurations customers are selecting rather than building up a lot of inventory in advance based on projections. For example, Apple reportedly boosted orders for the gold iPhone shortly after sales began based on the early demand.

    Adam

  • Report this Comment On November 19, 2013, at 3:33 PM, pondee619 wrote:

    Adam:

    Then do you know what the "analysts" are basing their "supply constraints" fears on? And why you are "skeptical (only) of the (MOST DIRE) supply projections for the iPad Mini with Retina Display". (emphasis is mine). This clearly implys that you are concerned about some less dire supply constraints. Or are "suply constraints" just something that is easy to talk about without having to rely on any supporting facts.

  • Report this Comment On November 19, 2013, at 6:59 PM, VitamanD wrote:

    Shhh. Loose lips sink ships. No need to advertise it.

  • Report this Comment On November 19, 2013, at 7:52 PM, TMFGemHunter wrote:

    @pondee619: analysts are basing their information on 1) calling hundreds of Apple stores to find out exactly which models are available for in-store pickup; 2) talking to people who work for Apple's suppliers in Asia; and 3) talking to third party distributors about how easy/difficult it is to get inventory.

    This is not an exact science, so I can't tell you that Apple has X million iPad Mini w/Retinas available for this quarter. It could be 2 million, it could be 4 million, or it could even be 6 million. But without knowing the exact number, I am still quite confident that supply constraints are real and will keep supply below demand for the next couple of months.

    Adam

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