An iPad Blowout May Be on the Way

Wall Street analysts may be underestimating Apple's iPad... big time!

Adam Levine-Weinberg
Adam Levine-Weinberg
Jan 25, 2014 at 10:15AM
Technology and Telecom

In one of the most eagerly anticipated events of the January earnings season, Apple (NASDAQ:AAPL) will report its holiday quarter results on Monday afternoon. Currently, analysts expect a tiny 2% year-over-year increase in EPS -- from $13.81 to $14.09.

These modest earnings growth projections stem in part from analysts' surprisingly low expectations for iPad sales. A recent survey of 28 professional analysts revealed that several actually expect a year-over-year sales drop for the iPad! Their unit sales estimates range from 21 million to 28 million, compared to last year's December quarter sales total of 22.9 million.

Analysts have low expectations for iPad sales, despite the debut of the iPad Air (Photo: Apple)

On average, these professional analysts believe that Apple sold 24.6 million iPads last quarter. However, usage data suggests that Apple will report iPad sales in line with the most bullish estimates -- or perhaps even better!

Measuring sales with usage data
Fiksu tracks usage of iPhones and iPads by model, and it has made the results public. While it's possible that there are some systematic differences in usage patterns between different iPad models, the usage data still provides a good proxy for the breakdown of the "installed base" by model.

There are probably around 160 million iPads in use today. Apple CEO Tim Cook announced back in October that the company had sold more than 170 million iPads since the product first went on sale in 2010. Including the three months that have passed since Cook made that statement, the cumulative iPad sales total is probably approaching 200 million.

71 million of those iPads were purchased in the fiscal year ending last September, and another 58 million were purchased in the prior fiscal year. My installed base estimate of 160 million assumes that almost all of these iPads -- as well as those sold in the last few months -- are still in use, while most of the older iPads (those sold in September 2011 and earlier) have been "retired."

The new iPads lead the way
Between this estimate of the iPad installed base and Fiksu's usage data, it's possible to generate a sales estimate for the new iPads Apple released last quarter. Apple tries to keep 4-6 weeks of iPad inventory in stores to prevent shortages. Since it is now nearly four weeks past the end of Apple's December quarter, the number of new iPads sold through to consumers by now should represent a rough estimate of how many new iPads Apple shipped last quarter.

Together, the two new iPad models -- the iPad Air and the iPad Mini Retina -- have recently accounted for 10.2%-10.3% of all iPad usage. This implies that more than 16 million of the new iPads are now in customers' hands. Nearly all of these iPads would have shipped during the December quarter and would thus be included in Apple's upcoming earnings release.

Older iPads stay strong
Despite combined unit sales of more than 16 million last quarter, the two new iPad models needed help from their older siblings for Apple to deliver strong growth in iPad sales. Fortunately, the original iPad Mini was a particularly strong seller during the holiday season.

Apple dropped the iPad Mini's list price from $329 to $299 when it unveiled the new iPad lineup in October. This made it the cheapest iPad ever. Moreover, the iPad Mini benefited from heavy promotional activity, such as a Wal-Mart Thanksgiving evening offer that gave away $100 gift cards to iPad Mini buyers!

The original iPad Mini was heavily promoted during the holiday season (Photo: Apple)

As a relatively affordable -- and still trendy -- gift option, the iPad Mini was a popular Christmas present. Despite strong sales of the new iPads and growth in the total iPad user base, the iPad Mini has actually gained usage share in the past few months, according to Fiksu's data. This data suggests that Apple sold about 10 million iPad Minis last quarter.

This brings the iPad sales total to around 26 million, which is already significantly higher than the average analyst projection. The older full-size iPads that were still on sale last quarter (the second- and fourth-generation models) made an additional modest contribution.

A recent Consumer Intelligence Research Partners study found that the iPad 2 still accounted for 5% of iPad sales last quarter, while the fourth-generation iPad accounted for 13% of sales. This suggests that consumers may have purchased 5 million or more of these older models last quarter.

However, most of those sales were probably drawing down inventory that had been shipped in the September quarter. This is particularly true for the fourth-generation iPad, which has now been discontinued. Thus, shipments for these older models may have totaled only 2 million last quarter.

Summing it up
Based on fairly conservative estimates derived from Fiksu's usage data, Apple probably shipped more than 16 million units of its new iPad Air and iPad Mini Retina (combined) last quarter. Including likely shipments of approximately 10 million iPad Minis and 2 million older-model full-size iPads, Apple may have shipped 28 million iPads in total last quarter.

That would be in line with highest sales estimate among Wall Street analysts, and more than 10% above the average sales estimate! With the outlook for iPhone sales also looking solid, Apple stock is likely to pop higher if this iPad blowout comes to fruition.