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Hey, Apple, What About Those iPads?

The market's relishing Apple's (NASDAQ: AAPL  ) blowout quarterly results, and rightfully so. There's plenty to like in the consumer tech titan's fiscal second quarter.

  • iPhone unit sales soared 17% for the period.
  • Apple's revenue may have inched less than 5% higher, but margins improved with net income climbing 7% during the quarter.
  • As a result of aggressive share buybacks, fully diluted earnings per share rose 15%, blowing past Wall Street expectations.
  • Stock splits may be zero-sum games, but there's no denying that the market's responding favorably to Apple's 7-for-1 stock split announcement.

These are just some of the reasons for the stock moving higher today, but what about the iPad? This is Apple's most recent major product category, following the debut of the iPod in 2001 and the iPhone in 2007, but it went the wrong way during the past three months.

Apple sold just 16.35 million iPads during the quarter. That's naturally well short of the 26 million that it cleared during the holiday quarter, but it was also 16% short of the 19.5 million iPads that it cleared during last year's fiscal second quarter. Once again, it's more than likely that Apple relinquished gobs of market share in the tablet space. There are plenty of mostly Android tablets out there put out by companies without the lofty margin markups that Apple is getting away with here.

The reason why a 16% year-over-year drop is so problematic is that Apple seemed to be gaining ground there after posting its first ever year-over-year decline in iPad unit three quarters ago. It followed that up with a flat performance during 2013's fiscal fourth quarter and a 14% pop in this fiscal year's freshman quarter.  

It's true that iPad revenue only slipped 13%. Folks are paying more for their iPads. However, isn't that also the problem? There are way too many cheap tablets out there, and unlike the iPhone, which stateside carriers subsidize to the point where it isn't that much more expensive than other shiny new smartphones, no mobile company wants to shave hundreds of dollars off your iPad purchase in exchange for a two-year contract. 

We'll have to wait a few days before Gartner, IDC, and other industry trackers put out their figures for tablet sales during the first three months of this calendar year. It's then that we will be able to fully assess how thin Apple's slice has become of this once-promising market. 

This obviously isn't going to freak out Apple bulls. They don't have a problem selling fewer tablets as long as Apple can sustain healthy margins. However, it has to be worrisome at some level to see the iPhone grow to the point where it's accounting for 57% of Apple's revenue and what was likely an even bigger chunk of its profit. The market's cheering Apple on today. They know that the iPod is fading fast. They accept meandering Mac growth. However, if the iPad continues to shrink in relevance, it's going to be that much more imperative that Apple crank out these game-changing products in new categories that we've been teased about for years.

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Read/Post Comments (5) | Recommend This Article (2)

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 April 24, 2014, at 2:46 PM, larryw101 wrote:

    Only a babbling fool like Rick Munarriz could put a negative spin on Apple today.

    Motley Fool needs to close shop with authors like this. Nobody that i know of values Motley Fool's opinion anymore.

    This guy Munarriz is a true joke !

  • Report this Comment On April 24, 2014, at 2:54 PM, steelmouse wrote:

    did you even listen to the earning call?

    Tim Cook, at the very beginning of the earning call, proactively and clearly explained the the misleading 16% YoY decline --- It's all due to channel inventory change. The sell-through in decline is only about 3%. With all the promotions and discountings that retailers like bestby, target, walmart were running over the holiday season, most people want an ipad already got an ipad back then. The 3% decline is actually great news taking that into account.

    Don't be lazy, Rick! You are becoming a laughing stock here. Listen to the earning call, or read the transcript.

  • Report this Comment On April 24, 2014, at 2:58 PM, Turfscape wrote:

    >>They accept meandering Mac growth.<<

    As opposed to the huge groundswell of PC growth from what company? Apple is growing Mac sales during a period of desktop decline. Yeah, I'll take "meandering" Mac growth as a driver of significant revenue and fat margins.

  • Report this Comment On April 24, 2014, at 3:29 PM, WineHouse wrote:

    Yes, steelmouse you are correct. Cook did make it perfectly clear. The problem is that biased individuals are unable to hear that which they don't like hearing.

    "We'll have to wait a few days before Gartner, IDC, and other industry trackers put out their figures for tablet sales ..." Ah, yes, good old Gartner and IDC -- we all know that those guys are PAID by Samsung to present data in ways that make it look as if Apple is failing, failing, failing.

    "Meandering Mac growth ..." meandering upward, as opposed to non-Mac PC's, which are crashing downward. Tablets are gradually taking over the "casual PC" market, leaving the personal computer field increasingly devoid of customers other than serious PC users. And what kind of home computers or travel computers do most of the serious PC users use? Duh. Three guesses. When the only PC purchasers left on the face of the earth are the serious PC users, the market will be quite small, but Apple will have the lion's share of market share. Meandering growth ... my foot!

  • Report this Comment On April 25, 2014, at 2:15 AM, singaporenick wrote:

    This guy writes such ignorant articles-at least do your homework first and you will see that the iPad decline was mainly due to channel inventory.Also,on the bright side in fact,ASP's were up,showing iPads being used more for business and amongst serious users,so the mix is quite good for apple in fact.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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