Shortly after the market closes today, Apple (NASDAQ:AAPL) will report its hotly anticipated holiday earnings. Unlike earnings from the past couple years when the company was riding a wave of positive momentum and its share price was on an uptrend, the mood headed into today's release can best be described as apprehensive.
Earnings may not only fall for the first time in a decade, but expectations surrounding Apple's earnings have been falling across the entire past quarter.
That's the bad news. The good news is that Apple is now trading down near 11.5 times earnings, and an encouraging report that exceeds expectations today could mute many of the concerns surrounding the company. Let's take a look into expectations surrounding the iPad, and how investors should interpret iPad sales today.
Among Wall Street analysts, iPad estimates range all the way from about 17 million up to 27 million. That's an extremely wide range, but most estimates center in the 20 million to 25 million unit range.
If Apple were to deliver on 24 million iPads in the quarter, and about 50% and 60% of those sales on 9.7-inch iPads, its trailing iPad sales history would follow the chart below. Keep in mind, the fourth calendar quarter on the chart -- the most recent one -- is an estimate.
How will the iPad affect Apple's earnings?
iPad estimates are extremely variable in large part because this is the first quarter the iPad ini will be included in Apple's results. Not only do investors have no past quarters to base estimates on, but the product has also been in short supply.
Nearly all evidence points to the iPad Mini being a huge hit. Just last week fellow Fool Evan Niu looked at reports that claimed production of the larger iPad was creaking to a halt. As with all supply chain "leaks," there are a number of explanations why the larger iPad could be seeing fewer sales, but a pretty certain explanation is the popularity of the smaller iPad Mini is weighing on its sales.
With the base iPad Mini costing $170 less than the base model of the newest 9.7-inch iPad, that'll mean we'll see a continuation of a recent trend with the iPad: unit sales exceeding the amount of total revenue the tablet lineup is taking in. If the iPad Mini ends up being 40%-50% of iPad units and the company sells 24 million iPads this quarter, that'd lead to iPad unit growth over last year of 55%, while total iPad sales growth would likely be closer to the 20%-25% range.
Adding it all up
The iPad is likely to be about 20% of Apple's sales for the quarter. That's a sizable chunk, but it's important to remember that the iPhone is expected to drive nearly 60% of company sales. If you're looking at whether or not Apple beats Wall Street's expectations, the iPhone will be the product which dictates last quarter's performance.
Overall, the area that'll most likely be in focus surrounding the iPad is the total number of units sold. With the tablet market at about 120 million units this year and forecasts of nearly 300 million tablets sold by 2016, the iPad's greatest potential for Apple is its growth across the next few years. From that perspective, it makes a lot of sense for investors to zero in on total iPad sales and make sure the product line is keeping up its momentum.
However, one big caveat is to not get too caught up in the Wall Street game of basing whether the iPad is succeeding or failing on whether it beats Wall Street targets in a single quarter. Given it's the Mini's launch quarter and it may have been affected by tight supplies, it'll be important to listen to Apple's conference call to get some surrounding commentary and analysis on whatever iPad sales number Apple ultimately posts.
Eric Bleeker, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.