The launch of Apple's (AAPL 0.96%) large-screened iPhones late last year, and the consequent sales explosion it triggered, will unquestionably prove to be the defining storyline for the world's largest technology company this year. At the same time, an unintended outcome of the surge in iPhone sales has been the natural de-emphasizing of Apple's iPad business in its operating results. However, the iPad's decline at the expense of the iPhone fails to convey the full reality of the situation, as Apple's tablet shipments began suffering from growth issues more than two years ago.
Clearly, Apple's iPad business has seen better days. However, much of the media commentary surrounding Apple's genuinely massive tablet business likely overstates the problems facing the iPad, as well. Hopefully, looking at the specific numbers for Apple's iPad division can help dispel some of the pessimism surrounding the iPad.
The state of Apple's iPad business
As the slower-growing, less-profitable sidekick to Apple's iPhone profit center, the iPad understandably gets less love from the investment community. Year-over-year, iPad unit sales have fallen for six straight quarters, and in eight of Apple's nine past reports.
Source: Apple SEC filings, author's calculations.
This certainly isn't encouraging, but it only tells part of the story. While iPad sales have struggled during the past two years, the device generates massive amounts of revenue on an absolute scale -- roughly $24 billion during the last 12 months, along with more than 50 million units shipped during this same period.
Source: Apple SEC Filings, author's calculations.
Following the 2010 launch of the iPad, sales quickly ballooned to trail only the iPhone as a percentage of Apple's overall sales. Over time, though, three factors slowly de-emphasized the iPad from Apple's operating results, from 19.8% of sales in FY 2012 Q1 to only 9.1% in Apple's most recent report.
The main culprit has been the meteoric rose of the iPhone, which accounted for nearly two-thirds of total sales last quarter. Additionally, the ongoing renaissance in Apple's Mac division continued, and the brisk expansion of Apple's services segment with the growth of Apple's burgeoning installed base, all helped diminish the iPad segment's relevance.
As noted above, this is a matter of arithmetic to a certain extent. However, the conventional wisdom that there's something wrong with Apple's iPad business largely overlooks the division's truly remarkable success.
Massive by virtually any measure
Although Apple iPad sales have struggled to keep up with other segments of its business, make no mistake -- Apple's iPad business is absolutely massive by any measure other than the iPhone. Furthermore, with Apple reportedly planning to launch a 12.9-inch iPad Pro, the division might enjoy an underappreciated catalyst in coming quarters.
Apple consolidates all its OpEx into a single line item on its income statement, making detailed valuations of its various divisions less precise than ideal. However, a reasonable back-of-the-envelope valuation of the division suggests Apple's iPad division should be worth somewhere in the ballpark of $85 billion as a stand-alone entity, depending on margin and multiples assumptions. That would place Apple's iPad business as the 88th largest stock among companies trading on the NYSE and Nasdaq, and that includes effectively double counting for dual-share structure companies like Berkshire-Hathaway and Google.
Viewed in terms of revenue, the $24.3 billion in sales the iPad division yielded during the past 12 months would place it in the No. 122 slot in the U.S. Fortune 500, ahead of giants of American industry like Union Pacific, Alcoa, and Northrop Grumman. Equally impressive, the iPad division itself would occupy the 490th place in Fortune's Global 500.
The point here is that the sheer enormity of Apple's iPad business often goes overlooked when discussing the product. Simply looking at the direction of sales growth can paint an unfairly pessimistic picture. By literally any available absolute metric, Apple's tablet business is a global behemoth.
It also speaks to the truly massive state of Apple's business that all four of its largest operating divisions -- iPhone, iPad, Mac, and Software & Services -- would all rank in the U.S. Fortune 500. So while the iPad likely will never prove a once-in-a-generation product like the iPhone, the conventional wisdom that the iPad is struggling overlooks many of the most relevant facts regarding Apple's tablet business.
