Late last month, Apple and Amazon each smashed expectations with their most recent quarterly reports, something I might or might not have predicted. However, Apple and Amazon have much more in common than surging share prices these days, and it isn't necessarily all good.
Even though the positives drastically outweigh the negatives at both Apple and Amazon, both of these tech giants have seen tablet businesses fall off a cliff in the past few months. Samsung's (NASDAQOTH:SSNLF) tablet business is also feeling the pain.
Last week, market research firm IDC released its estimates of the tablet market's evolution for the full-year 2014 and the fourth quarter. The results proved far from encouraging.
The high-level silver lining is that the tablet market as a whole eked out a small gain for the year. Heading into 2015, this decelerating growth shows no signs of stopping. The tablet market is expected to grow a mere 1% in 2015, according to research firm Gartner, which doesn't quell concerns about long-term growth potential.
Much of the tablet market's growth occurred in the second and third quarters of last year. Looking to the fourth quarter, things turned positively abysmal for nearly every major name operating in this space.
There are a few noteworthy items investors should understand here. For starters, the fourth quarter marked the first ever year-over-year quarterly contraction since the tablet market's inception in 2010. Apple and Samsung (NASDAQOTH:SSNLF) anchor the overall market, together roughly producing half of total unit sales volume, but their respective sharp contractions during the fourth quarter were the main drivers behind the market's historic slowdown. Also noteworthy is that the strong performance of the "other" category indicates the ongoing fragmentation of the tablet market remains firmly in place, particularly in emerging markets.
Beyond these high-level takeaways, however, investors should also understand the company-specific dynamics at play.
The new normal?
For Apple, there's little doubt the larger screen size of the iPhone 6 and (particularly) the 6 Plus ate into the demand for its tablets. With the introduction of the iPad Mini and larger-screened iPhones, the form factors for Apple's two best-selling devices have been on a collision course for years now -- and we clearly witnessed the fallout of these converging forces in the fourth quarter. The resounding quarterly success of the iPhones obviously cannibalized potential sales from Apple's iPad business, a dynamic that actually benefits the company's long-term financial outlook.
A bit of perspective is also key in assessing Samsung's tablet business. Although shipments fell sharply during the fourth quarter, Samsung still managed a slight uptick in its full-year shipments. As with its smartphone business a few years ago, Samsung has positioned itself as the primary Android tablet-OEM, or original equipment manufacturer, for consumers seeking an alternative to Apple's iOS. Its Galaxy lineup of tablets has been well received, and Samsung's shift toward the midtier has helped grow its addressable market while avoiding the low-margin end of the market. If it can defend its leadership of the mid-to-high end Android space, Samsung will remain positioned to thrive in the tablet market, much like Apple.
Amazon, on the other hand, is a different story. The sharp contraction in its full-year and fourth-quarter tablet shipments don't give much reason for optimism. Like Apple, Amazon went into the holiday quarter with a fresh tablet lineup with the new 8.9-inch Fire HDX and the 6-inch Fire HD. The kinder explanation for Amazon's roughly 70% decline in tablet shipments would be that consumers shifted their purchasing strongly toward the smaller Fire HD, although that's difficult to say with certainty. (Keep in mind, IDC's numbers don't include the 6-inch Fire HD because of its smaller screen size.) Interestingly, Amazon's most recent earnings release made no mention of its tablet business whatsoever, and considering the similarly spectacular failure of Amazon's Fire Phone, Amazon's smart device strategy is clearly not resonating with consumers.
Amazon is losing badly in smartphones and tablets, yes. But this isn't the end of the world since Amazon only sells the devices as a glorified funnel into its much larger core retail and content businesses. Its overall growth trajectory is still positive, and any demise of Amazon's tablet business cannot significantly derail its overall investment thesis.
The global tablet market could certainly be at an inflection point. As was the case with Apple, the trend toward larger smartphone screen sizes helps negate tablets' overall consumer appeal. And since they're mostly used in Wi-Fi rich environments (i.e., home or work), tablets typically don't get the same kind of subsidy support from carriers, which seems to extend their refresh cycles by several years. But while the tablet market's most heady growth days of might be behind it for good reason, let's not forget that they represent only a fraction of the investing narrative at Apple, Amazon, and Samsung.