It is well-known that Apple's (NASDAQ:AAPL) iPad business has been in decline for a couple of years. Market observers generally cite a relatively long tablet-replacement cycle coupled with cannibalization of the iPad by larger iPhones as key reasons for the recent declines in iPad sales.
However, back in October, well-respected analyst Ming-Chi Kuo with KGI Securities argued that the "worst is over for iPad." The analyst thinks that iPad average selling prices are poised to rise as a result of sales of the iPad Pro, which should serve to offset continued unit declines.
I think this argument makes a lot of sense. Here's why.
iPad Pro already starts expensive and there's all the reason to buy up
The iPad Air 2 starts at $499 (16-gigabyte model with Wi-Fi) all the way up to $829 for a 128-gigabyte version with both Wi-Fi and cellular connectivity.
The iPad Pro with 32 gigabytes of memory starts at $799, with the next model up sporting 128 gigabytes of storage and selling for $949. Apple doesn't offer a cellular version of the 32-gigabyte model, but the 128 gigabyte model with cellular goes for an eye-popping $1,079.
What's interesting is that there's no middle option. For $799, a user is able to get a really fast, well-built device that is almost certainly going to wind up limited by the relatively meager 32 gigabytes of on-board storage. I suspect this will drive many, if not most, iPad Pro customers to choose the higher-end storage configuration.
Additionally, there's clearly a market for iPads with cellular capability, and I'd imagine the proportion of iPad Pro buyers interested in cellular capability (since it is a more professionally oriented device) is higher than among iPad Air/iPad mini buyers. This could tilt the balance further toward the even higher priced and probably higher margin iPad Pro 128-gigabyte model with cellular capability.
One more thing to consider
In addition to the fact that iPad Pro may help boost Apple's iPad average selling prices enough to stabilize revenue, it's important to note that a key part of the iPad Pro experience is the $99 Apple Pencil.
The device has generally been praised and seems to be selling quite well. Although a recent report from Kuo suggests the device is simply very tough to manufacture, my guess is the Apple Pencil is still selling quite well relative to the total number of iPad Pros being sold.
Apple almost certainly records Apple Pencil revenue under its "other products" category, which includes "Apple-branded accessories," rather than in its iPad category. Success of the Apple Pencil wouldn't directly impact Apple's iPad revenue and average selling prices, but I do think Apple will be selling much more accessory content per iPad Pro than it does with other iPads, leading to even higher "effective" iPad average selling prices.
How important is iPad to Apple stock?
Frankly, although much has been made of the company's iPad business, I don't see it as all that important to the company's share price over the long term. Apple has been and continues to be a company that derives the majority of its revenue and likely an even larger majority of its operating profit from iPhone.
It would certainly be nice if iPad could once again be a growth engine for the company (more revenue/profit growth is always welcome), but I don't think it's going to move the needle for Apple stock either way. As long as Apple can deliver robust iPhone sales growth, Apple stock should do well; should it falter in delivering this growth then, despite what happens with iPad, Apple stock may stagnate or even fall.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of 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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