On Wednesday, Apple (NASDAQ:AAPL) finally announced the 12.9-inch iPad Pro -- a product that's been a frequent rumor-mill subject for more than two years. In addition to being a lot bigger than any previous iPad, the iPad Pro will also have a big impact on the growth of the iPad category and on Apple's bottom line.
What the iPad Pro does
The biggest advantage of the iPad Pro is obviously its larger size. It has more pixels than its smaller brethren and more screen real estate to take advantage of new multitasking features in iOS 9.
Apple executives repeatedly mentioned that the big screen would allow for better gaming and movie-watching experiences. The iPad Pro also has a four-speaker array for better sound. Gamers will be particularly happy about the new A9X chip inside the iPad Pro, which provides 1.8 times the CPU performance and up to two times the graphics performance of the iPad Air 2, according to Apple.
But the main target market for the iPad Pro is the business community. Its multitasking capabilities will clearly be important there. So will two new optional accessories designed especially for the iPad Pro.
The first is the $169 Smart Keyboard, a full-size keyboard accessory. While Apple executives have previously noted that it can be awkward to work with a touchscreen-keyboard combination, the Smart Keyboard will allow for faster, more accurate typing. That will increase the iPad Pro's usefulness in a work setting.
The second accessory is the $99 Apple Pencil stylus. One important business use for the Apple Pencil will be annotating documents and spreadsheets. Apple also emphasized the possibilities for the iPad Pro as a sketching tool for creative professionals (and consumers) -- by tilting the Apple Pencil or pressing more firmly, you can produce thicker, darker lines.
A game-changer in the business market
Apple has put a lot of effort into promoting the iPad as a business tool in the past couple of years. Most notably, it forged a partnership with IBM last year to create more than 100 industry-specific iOS apps and a variety of other services to enhance the value of the iPhone and iPad for business uses.
That partnership is starting to bear fruit. However, up until now, Apple hasn't had an iPad that was specifically designed with businesses in mind. With the iPad Pro, Apple is now offering better hardware for many business-use cases, to go along with improved software.
As a result, while I don't expect the iPad Pro to be a big consumer hit -- though there will undoubtedly be plenty of hardcore Apple fans who buy it -- it could become a big seller in the enterprise world. Those sales aren't likely to come right away, as businesses usually take their time to test new products before rolling them out widely. But the iPad Pro should see growing adoption over the course of 2016.
The financial impact
The iPad Pro will probably never sell at the same volume as the smaller iPad versions. But because of its significantly higher price than the other models, it will have a disproportionate impact on Apple's financials relative to its unit sales.
In FY12, Apple sold 58.3 million iPads at an average selling price, or ASP, of $531. Two years later, unit sales were up to 68.0 million, yet total revenue from the iPad was down, because of a steep drop in the ASP to $445. In FY15, a double-digit unit sales decline is being exacerbated by a further ASP decline to around $420.
With a starting price of $799, the iPad Pro will bring in far more revenue per unit than the other iPads. The most popular versions are likely to be the 128GB models, which run $949 for Wi-Fi only and $1,079 for Wi-Fi plus cellular. The total asking price for the top-of-the-line model plus the Smart Keyboard and Pencil accessories is a hefty $1,347.
As a result, Apple only needs to sell about 10 million units of the iPad Pro in the coming year to generate $10 billion of incremental revenue. And at such a high ASP, the iPad Pro is likely to be Apple's most profitable iPad.
Taking in $10 billion would represent a big boost to iPad revenue, which totaled $24.3 billion over the past four quarters. (There could be upside to that figure, if the iPad Pro catches on with enterprise customers.)
Beyond just boosting Apple's top and bottom lines, getting iPad revenue growing again will help Apple diversify beyond the iPhone, addressing one of Apple bears' key criticisms. The biggest iPad ever could therefore play a big part in getting Apple stock back on track.
Adam Levine-Weinberg is long January 2016 $80 calls on Apple, short January 2016 $120 calls on Apple, and short January 2016 $140 calls on Apple. The Motley Fool owns and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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