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Apple’s iPad Pro Won’t Change Its iPad Troubles

By Jamal Carnette, CFA - Sep 15, 2015 at 10:00AM

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Although Apple has a solid, enterprise-focused unit with its iPad Pro, Apple will continue to struggle in that product line.

Apple's new iPad Pro is $300 more than the iPad Air 2. Source: Apple.

The media's response to Apple's (AAPL 0.17%) September event was fascinating on many levels. Although coverage centered on Apple's newest products -- Apple Pencil and the new iPad Pro -- alongside an Apple TV refresh, it's safe to say the company's intermediate future will be driven by the next generation of its iPhone unit. To pretend these other products will make a meaningful impact on Apple's bottom line is simply fiction.

For comparison, during the last three quarters, Apple's percentage of revenue derived from its iPhone business has climbed higher than 60% on the back of 50%+ year-on-year growth. During that same period of time, Apple's non-iPhone side has struggled by reporting year-on-year revenue drops in two of those three periods. For a graphical representation of Apple's iPhone growth versus the rest of the company, see the chart below:

Source: Apple's 10Qs. Revenue figures in millions.

While there are benefits to Apple's iPhone growth, as it's reported to be Apple's highest-margin product, this does present risks to the investment. If you don't believe me, ask Apple: The company recently added a new disclosure to its risk section that addresses its reliance on one product. But if you're looking for heavy contribution from the iPad Pro, you're probably looking in the wrong place for growth.

The iPad has continued to struggle
When it comes to Apple's ex-iPhone revenue, perhaps there's been no bigger cause of Apple's slump than its iPad line. After quickly becoming Apple's second-most important by revenue, the last two years have not been so kind.

During the last year, the product has struggled, and been surpassed by Apple's Mac line in three of the last four quarters and has posted year-on-year decreases in each of the last four quarters. Here's a chart of the iPad's regress:

Source: Apple's 10Qs. Revenue figures in millions.

Apple isn't the only company that's struggling within the greater tablet market. If you look at the entire market, you'll see a maturing industry with a slower upgrade cycle than Apple's iPhone. Apple's newest offering -- the 12.9-inch iPad Pro -- probably won't reverse Apple's sales trajectory. It seems even Apple doesn't think it will be the iPad savior.

What's the value proposition?
It seems as if Apple has positioned the iPad Pro to be an enterprise-focused model. The larger screen, added to the existing side-by-side split-view functionality, appears to signify a commitment to productivity. And it isn't as if the device isn't impressive -- it is -- but the question is, are price-sensitive enterprise buyers going to fork over the higher costs for a unit when the current iPad Air 2 has many of the features businesses require for $300 less? The answer, I believe, will most likely be no.

Even Apple doesn't seem to think the unit will be a game changer. Supply-chain rumors hint at Apple expecting modest demand, at best. Per Patently Apple, the company's orders for the new unit represent the smallest figure of all iPads. The article expects the device not to have a meaningful effect on Apple's income statement, even when accounting for the higher revenue per unit the iPad Pro will bring.

Earlier, Apple supply-chain guru Ming Chi Kuo estimated calendar 2015 sales to be somewhere in the 4 million to 5.5 million range. For a company that sold 21 million iPads in last year's corresponding first fiscal quarter, this isn't a huge amount for a new iteration, and this figure will probably cannibalize other iPad unit sales.

Apple investors should look toward the new iPhone 6s iteration with its new 3D Touch for future fundamental performance.

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