It's earnings season, and it's likely that Apple (NASDAQ:AAPL) has perhaps the most highly anticipated report of all. Now that the earnings are out, it looks like nothing but smooth sailing for the company. Apple produced satisfactory results that sent its shares rising, continuing the trend of an impressive rally over the past year.
But things might not be as smooth sailing for Apple as they may seem. While most investors obsess about Apple's solid results and prospects for future growth from upcoming product releases, there's a glaring reason for concern.
All eyes are on the upcoming release of the iPhone 6, but what investors might not realize is that Apple's advancements in the iPhone are coming at a direct cost to one of its other key products: the iPad. The iPad is slowly eroding, and if predictions of the next iPhone's size are true, then Apple's iPad troubles could just be beginning.
All about iPhones
Over all, revenue and earnings per share grew 5% and 19% respectively for Apple. Those are certainly good results, and Apple showed strength across several categories and in multiple markets. Not surprisingly, the iPhone was the main contributor to the company's success. That said, in Apple's current position, it's more reliant on one product category than any other. In fact, the iPhone accounts for 52% of the company's total revenue.
Sales of the iPhone jumped 9% worldwide to $19 billion. Apple sold 35 million iPhones last quarter, more than all of its other devices combined.
Contributing to this sales growth was the success of the iPhone overseas. Apple did particularly well in the emerging markets. For example, sales in China jumped 28%, which blew away every other geographic area. As you might expect, the iPhone was the major reason for this sales growth. iPhone units soared 48% in China last quarter.
But not all is well. While the iPhone grows, the iPad is declining. Sales of iPads fell 8% last quarter and are down 3% over the first nine months of this fiscal year.
On the earnings conference call with analysts, CEO Tim Cook stated that the performance of the iPad actually met management's expectations. He still believes that the iPad has room for growth, based on the fact that half of the people who buy iPads are new Apple customers. Moreover, he believes that industry estimates calculate that the tablet market will soon overtake the personal computer market.
But that's not really the point. What should be concerning to investors is that Apple's major product, the iPhone, is beginning to cannibalize sales of a separate key product, the iPad. If rumors of what the iPhone 6 will look like are true, then this trend could get even worse for Apple.
Is Apple about to destroy its tablet business?
According to the financial media, Apple is preparing to launch the iPhone 6 later this year. When it does, it will likely reveal that the new iteration of its iconic device will have a larger screen.
Most phone manufacturers already employ larger screens, which are appealing to consumers. Apple has taken a lot of heat from critics who contend that its smaller screen sizes are doing it more harm than good.
But Apple's small screen size may have been an advantage all along, because it might have incentivized customers to get both an iPhone and an iPad if they wanted both. Big phones with larger screen sizes, often called "phablets," contain a mix of features from both phones and tablets.
The IBM partnership may not be enough
On the conference call, Cook noted that the market for iPads in the United States remains weak. He's counting on Apple's budding partnership with International Business Machines (NYSE:IBM) to restore iPad growth at the enterprise level.
IBM will create more than 100 business applications to be utilized specifically on the iPhone and iPad and run on Apple's iOS operating system. Apple will receive the benefit of having IBM's huge sales force pitch iPhones and iPads to its network of business customers.
But again, if the iPhone 6 can both function as a phone and mimic a tablet's performance reasonably well, then it stands to reason that consumers won't buy both if they don't need to.
The bottom line is that while the iPhone continues to do well, Apple is quickly becoming a one-trick pony.