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How Apple Inc. May See a Return to Growth in the iPad

By Ashraf Eassa - Feb 7, 2016 at 2:35PM

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Apple CEO Tim Cook reportedly said that iPad will return to growth by the end of 2016; here's how the company might make good on his promise.

Last quarter, Apple (AAPL -0.09%) reported yet another painful plunge in sales of its once-promising iPad lineup to the tune of 25% in units and 21% in revenues on a year-over-year basis. This acceleration in the decline of the iPad from the prior quarter -- units and revenue were both down 20% year over year -- came even as Apple introduced the iPad Pro and introduced a significantly revamped iPad Mini.

Although the iPad Air 3, which is rumored to be coming in March, could help to provide a boost to overall iPad sales (especially if Apple reduces the prices on the current generation iPad Air 2), new product launches in the iPad category haven't seemed to be of much help lately.

However, despite what seems like an utterly dire situation for iPad, no doubt thanks significantly to the continued proliferation of larger screen iPhones, it would seem that Apple CEO Tim Cook believes that the product category will return to growth by the end of 2016.

Here's what Tim Cook reportedly said
According to 9to5Mac's Mark Gurman, citing "multiple sources" in attendance of a "Town Hall" meeting at Apple's headquarters, Cook was apparently "especially bullish" on iPad as a product category. He's seemingly so bullish that he reportedly told Apple employees that he expects the iPad to return to revenue growth by the end of 2016.

Given the steep declines that the iPad product line has seen in recent quarters, this seems to be, shall we say, optimistic. However, I do think it's a worthwhile exercise to speculate as to why Cook has such confidence in a recovery in the growth trajectory of the product line.

Digging deeper
It's not clear from the 9to5Mac report whether Cook was referring to calendar 2016 or to fiscal 2016, which ends in September. If I had to hazard a guess, I'd bet that his comments referred to fiscal 2016. Here's why.

In the first fiscal quarter of 2016, Apple only had the iPad Pro on sale for part of the quarter. I suspect that this will mean that some demand for the iPad Pro will be pushed into the second fiscal quarter of the year -- the current quarter -- which should help provide a boost to revenue.

Additionally, since Apple didn't release new iPad products in the second quarter of fiscal 2015, it should be able to enjoy a bit of a tailwind on a year-over-year comparison.

Where things get even more interesting is that if Apple is planning to launch the iPad Air 3 at an event in March, suggesting that sales and revenue won't affect Apple's top and bottom lines until the company's third fiscal quarter of the year, this should help to provide a boost in revenue.

Indeed, in the first full quarter the iPad Air 2 was available, Apple enjoyed a big sequential boost in iPad units and revenue -- 74% and 69%, respectively -- thanks to the ramp-up of the product, even if year over year the iPad was down. I suspect that the iPad Air 3 introduction should enable a similar sequential bump over the results that Apple will report in the fiscal second quarter.

Such a surge in iPad revenue would make the year-over-year comparison very favorable, albeit not quite "apples to apples," so to speak. I suspect that this, rather than any major fundamental change in iPad demand, is how Cook plans to make good on this promise to his employees. 

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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