Apple's iPad appears to now have a "see what sticks" strategy that's more characteristic of Samsung. Source: Apple
Apple (AAPL 1.19%) investors are elated with the recently reported fourth quarter -- and for good reason: The company reported revenue of $42.1 billion and net profit of $8.5 billion, improvements on last year's results of $37.5 billion and $7.5 billion, respectively. The market rewarded the results, with shares jumping nearly 3% in the after-hours market.
However, if there was a dim spot in Apple's earnings it was its iPad unit. The product disappointed analysts by posting drops on both a quarter-over-quarter basis and when compared to last year's corresponding quarter, with declines of 10% and 14%, respectively. Matter of fact, during the quarter the company's Mac line overtook the iPad division as Apple's second biggest revenue-driving product, with $1.3 billion more in sales.
Recently, Apple rolled out its new iPad lineup in its October event. However, with five different iterations of the iPad available for sale, it appears Apple is looking to follow Samsung's strategy rather than the highly-focused model its operated on for years.
You want choice, Apple has it ... but is that for the best?
Apple's always kept its product line rather tight and more focused than other consumer electronics companies. Compare that to Samsung that generally releases multiple iterations, form factors, and prices points in what's been dubbed a "see what sticks" strategy. Apple's focused strategy allows the company to keep high margins: Apple reported gross margins of 38% versus Samsung's 6% consumer electronics division gross profit last quarter.
And while Apple has decided to stick to the high end and ignore the low end -- virtually abandoning many developing markets, whereas Samsung's strategy is to sell to all market demographics -- the company's iPad lineup appears to be a "see what sticks" strategy more characteristic of Samsung. Its new product lineup consists of five iterations of the iPad and more than 50 different combinations of storage, form factor, and color. And in a rarity for Apple, the company now has three generations of a product available for sale with the iPad mini.
To be fair, it just isn't Apple ... and Apple could benefit from this
And while Apple bears point to the struggling iPad as a cause for concern (mostly because Apple is performing well otherwise), this isn't an Apple-specific problem. Growth in tablets are slowing with a noticeable trend toward lower-cost units, indicative of a "good enough" market. Gartner estimates tablet sales in 2014 to post 11% unit growth in 2014, down from 55% in 2013.
It appears a multitude of factors are to be blamed for the slowdown: slower consumer upgrade cycles, competition from 2-in-1 devices, a better-than-expected PC market (albeit still poor), and competition from larger phone form factors. And this isn't necessarily a negative for Apple. As previously mentioned, Apple's Mac line was the second-largest revenue driver, reporting an 18% increase over last year's quarter. In addition, Apple increased its iPhone revenue 21% over last year's quarter.
And while many bears may point out cannibalization of the iPad mini with the iPhone 6 Plus, whether this is a negative for the stock or not is up for debate. The iPhone is historically a higher-margin product, but Apple loses out on purchase if cannibalization occurs. That said, I think Apple investors will gain more Android phone switchers by the larger iPhone 6 Plus than it will lose from cannibalized iPad mini sales.
Final thoughts
Apple's iPad has seen better days, no doubt about it. Apple seeks to reinvigorate growth by following Samsung's "see what sticks" strategy. Personally, I think this points toward the company not really having a clear strategy to reverse the iPad's trend. Investors should look for this product to continue to underperform going forward.
With that being said, shortly Apple Pay and the Apple Watch will make their way onto Apple's income statement, making the company even less dependent on the iPad for revenue and profit. Apple's been faced with a declining demand before -- at one point Apple's highest-selling product was its iPod, it recovered from declining sales of that product rather well.
