Image source: Apple
Throughout 2014, Apple (AAPL 0.20%) has been trying to shake the negative storyline among investors that its iPad business is struggling. Year-over-year unit growth for the company's tablet sales dipped into negative territory for the first time last year, and Apple has struggled to buck that trend. Three out of four quarters during Apple's fiscal 2014 put up negative numbers in the category.
Source: SEC filings. Fiscal quarters shown
Tim Cook has preemptively addressed concerns during earnings calls, acknowledging that the Street was expecting more when it came to iPad unit sales. Short-term nuances like changes in channel inventory and product cycle timing technically hurt Apple's figures, but Cook argues that the market's long-term upward trajectory remains intact. The good news is that tablet worries haven't held back Apple's stock performance: shares are up over 40% this year and near all-time highs.
Here's more evidence that Apple's iPad woes are indeed little more than a speed bump.
Fastest adoption ever
Market researcher NPD just put out a report indicating that tablet ownership in the U.S. continues to rise, and the broader product category continues to grow "at a faster rate than that of any other connected device." The tablet installed base has more than tripled over the past year, with 109 million tablets now in use. NPD also found that consumer usage behavior is gravitating toward video-based activities: video calling, recording and sharing videos, or watching videos.
As the industry optimizes around enabling video usage, there is an opportunity to sustain long-term growth. Most people don't opt for cellular-equipped tablets, but mobile carriers may eventually find an optimal balance to promote usage, spurring additional adoption in the process.
A tale of 3 iDevices
Apple's own figures similarly corroborate NPD's findings. The iPad has easily been the most quickly adopted product category compared to the iPod and iPhone before it. You may remember those product adoption curves you learned about in college. Led by iPads, tablets are progressing through the adoption phase at a breathtaking pace.
Source: SEC filings. Fiscal quarters shown
Inevitably, the market will progress into the maturity phase, where most sales come in the form of upgrades. It would be premature to characterize the overall tablet market as entering the maturity phase now, but there is naturally a good portion of upgraders already.
Apple's recent "weakness" in iPad sales is a function of how quickly the product was adopted, which effectively front-loaded its results toward the earlier years. Of course, Apple's ability to convince buyers to upgrade also depends on the performance gains that it can deliver with each new model (the A8X in the iPad Air 2 offers 40% CPU gains and 2.5 times graphics performance compared to the iPad Air 1).
Much ado about tablets
Each market segment is different, too. NPD's figures only describe U.S. consumers. Apple still has opportunities in emerging markets and with U.S. enterprise customers as well. Without a doubt, emerging markets are still early in the adoption phase, and consumers in those markets are more likely to buy only one product category due to lower disposable income.
Meanwhile, Apple's partnership with IBM is just now starting to bear fruit, with this month's release of the introductory batch of IBM Mobile First apps that are specialized toward key enterprise uses. As the U.S. consumer market transitions toward upgrades, Apple should also be able to address emerging markets with older, lower-priced models. Pair that with the fact the enterprise tablet market is still young -- what are investors worried about?
