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Could an iPad Refresh Boost Apple's Earnings? Not by Much.

By Daniel Sparks - Apr 2, 2013 at 6:00PM

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Apple investors are looking for a driver to kick-start earnings back into a growth cycle.

Apple (AAPL 1.62%) investors are looking for a driver to kick-start earnings back into a growth cycle. With an iPad refresh likely just around the corner, could the popular tablet save Apple from its not-so-impressive growth? Probably not.

Riding on the success of the iPad Mini
Apple's iPad Mini has seen surprising success. Half of the company's first-quarter record tablet sales were likely attributable to the smaller tablet, which was only available for purchase during two-thirds of the quarter, according to Canalys. Apple's unit iPad sales were up 48% from the year-ago quarter. Revenue from the product segment was less impressive, due to the lower average selling price from the new product mix, which included the lower-priced iPad Mini. Even so, revenue for the segment was still up 22%, though these numbers were slightly skewed down because the quarter contained an extra week.

Much of the iPad Mini's success is obviously attributable to its lower price point. But one can also argue that the significant departure from the old form factor to a redesigned encasing could also be a major driving force of sales.

Source: Apple.

The iPad Mini has significantly narrower bezels than the iPad, with the display making up a larger portion of the front side of the device. It's 53% lighter and 23% thinner than the third-generation iPad. The encasing has an aluminum finish that gives the device a very refined look on the edges and the backside -- especially the black version of the device.

The rumored iPad refresh in April will likely be a redesigned full-sized iPad to reflect the encasing design on the iPad Mini, according to iMore. But iMore is less sure about a new release of the iPad Mini.

Typically, Apple is limited by supply -- not demand -- in the quarters it launches new iPads and iPhones. Historically, Apple has managed to incrementally ramp up the availability of new products with each new generation of a product line. With a redesigned form factor and smoother rollout, an iPad should perform well in Apple's third quarter if it arrives by late April or early May as rumored.

Don't expect much
The overall growth of the tablet market will work in Apple's favor yet again. A study released last week by IDC projects tablet shipments to increase 174.5% between 2012 and 2017. Year-over-year shipments increased 78.4% in 2012 alone.

In light of overall tablet market growth, a smoother rollout, and a redesigned form factor, investors can likely expect about a 25% to 30% increase in year-over-year iPad sales.

Assuming Apple's profit margins for the iPad segment are affected by the lower gross margins associated with the iPad Mini and the new form factor on a redesigned iPad, I'll use an estimated gross margin on the product line of 36% for this year and 40% last year.

The result? Apple could end up with an incremental growth of approximately $0.3 to $0.4 billion in its third-quarter earnings. That's an increase of about 4.1% to 5.1% -- not much.

Are Apple investors doomed?
Apple investors are definitely not doomed. But they shouldn't expect an iPad refresh to have a large positive effect on Apple's third-quarter earnings -- at just 20% of total revenue, it's tough for Apple's iPad to meaningfully move the needle.

Fortunately, Apple investors don't need much growth for the stock to perform well over the long run. At just 10 times earnings, tough times are priced into the stock. In the short run, however, a very likely boost to Apple's dividend could compensate for the stock's lackluster growth in its product segments.

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