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Will the iPad Disappoint in Apple's Q3 Earnings?

Apple's (NASDAQ: AAPL  ) second quarter iPad sales were a bit of a disappointment for investors. The tablet's sales decreased more than 16% year-over-year and left the company's CEO Tim Cook spending time on the earnings call explaining why the iPad failed to deliver for the quarter.

With Apple reporting quarterly results later this week, the big question is whether or not the company's second-biggest revenue producer can outperform the year-ago quarter.

Source: Screenshot from Apple video ad.

Fortune's Philip Elmer DeWitt put out his quarterly consensus report, and results show analysts (as usual) have mixed predictions. On the high side some analysts predict 16 million iPads sold, with the lowest estimate pegged at just over 12 million. That's a big range, and leaves the consensus at about 14.4 million.

If Apple's iPad sales hit that average it would be another disappointing quarter -- the company sold 14.62 million in Q3 2013.

Source: Apple.

Apple earns 17% of its overall revenue from the iPad, the iPhone takes the majority of revenue at 59%. But even though the iPad isn't the key revenue driver, sales of the tablet significantly impact the company's bottom line.

In Q2, Tim Cook said the drop in iPad sales year-over-year came from channel inventory problems and a stabilization of iPad Mini supply and demand.

He tried assuaging investors by talking about how the iPad is the "fastest growing product in Apple's history."

But future iPad problems may be out of the company's control.

Tablet setbacks for all
(NASDAQOTH: SSNLF  ) reported its quarterly guidance earlier this month and admitted its tablet sales were "sluggish." The company said two things were to blame. The first is the longer replacement cycle tablets have compared to smartphones. The second is that larger smartphones are eating into small tablet sales.

That matches up with recent NPD Display Search data showing small tablet unit share peaked in 2013, but will continue to decline. The research firm said, "Major brands are likely to move to larger sizes" and that the larger form factor will continue to overtake smaller tablets through 2018. That may be one of the reasons why Lenovo just stopped sales of its 8-inch Windows tablets in the US.

iPad Mini. Source: Apple.

But it's not just the small tablet market Apple has to worry about. Gartner released a report earlier this month showing the PC market is stabilizing and the tablet shipments overall are slowing down.

The research firm said many consumers have already replaced PCs with tablets for things like entertainment viewing, and it's "seeing a slowdown in premium tablet sales, which have already penetrated a large number of households."

We'll find out this week whether or not Apple is able to buff its own channel inventory issues of last quarter and the broader slowdown in tablet sales, but I think Apple will have a hard time overcoming slowing tablet growth. The third quarter hasn't traditionally been a strong one for iPad sales, and with replacement cycles slowing, many consumers who already wanted the latest iPad may have already upgraded in Apple's typically strong first quarter.

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  • Report this Comment On July 22, 2014, at 8:55 AM, lenholliday wrote:

    Apple(AAPL) will face a big slow-down with their current produces as everyone on Planet Earth has phones out-the-butt. Most have already replaced with the latest and new product. Reminds me of the PC market going into Y2K. Everyone already owns the latest and greatest! Without a very strong new product very soon, Apple is cooked! If you own this stock, I would sell it today on the open before the so-so earnings come out after the close! If you are a trader type; I would sell AAPL Short at $94 with a Buy-Back Target of $60 during October or November of 2014! I bought the Oct. of 2014 70 strike Put for 10 cents each! My sell target is $1.00 which would be 10X my money back if I am right! Happy Trading from the retired Stockbroker!

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Chris Neiger

Chris has covered Tech and Telecom companies for The Motley Fool since 2012. Follow him on Twitter for the latest tech stock coverage.

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