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Slowing Tablet Sales Yet Another Thorn In Apple Inc.'s Side

By Tim Brugger - Feb 9, 2016 at 5:30PM

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The iEverything maker’s stock is already under pressure, and things may get worse before they get better.

It's been a tough start to the year for Apple (AAPL 1.96%) shareholders, thanks in large part to concerns about a saturated smartphone market, particularly for high-end devices. In some respects, Apple is a victim of its own success. For the first time since 2003, Apple is projecting a decline in year-over-year revenue for its fiscal 2016 Q2, to a range of $50 billion to $53 billion. Most companies would love to have the "problem" of generating over $50 billion in quarterly sales, but Apple's not most companies.

About two-thirds of Apple's revenue is generated from iPhones, so the projected slowdown of smartphone sales is largely responsible for its 10% decline in share price year to date. However, it appears an uptick in iPad sales, one of Apple's bright spots according to CEO Tim Cook, isn't likely to stem its revenue slide. In fact, if Q4 2015 tablet sales are any indication, iPads, like the rest of the tablet market, are facing more pressure than smartphones.

Just the facts
Long known for being one of the tech sector's leading innovators, Apple's iPads are behind the times, according to new data from research firm IDC. With 16.1 million iPads shipped in Q4, Apple is still the undisputed tablet sales leader, easily outdistancing nemesis Samsung (NASDAQOTH: SSNLF) and its 9 million units sold. That's the good news.

The not-so-good news is that Apple's tablet sales last quarter were nearly 25% less than a year ago, well below analyst estimates of 17.3 million. And it appears things will get worse before they get better. On an annual basis, the tablet market's drop of over 21% in 2015 last quarter was the largest decline ever. When coupled with Apple's missing iPhone sales estimates and the expected drop in shipments this year, its rapidly eroding tablet sales could be viewed as yet another nail in the coffin, so to speak.

All is not lost
But before Apple investors start running for the hills, there is some light at the end of the tunnel thanks in large part to one of its longtime rivals. As per IDC, Apple's iPad Pro -- which sounds suspiciously close to Microsoft's (MSFT 2.24%) much ballyhooed Surface Pro -- is leading the way in what is quickly becoming a fast-growing niche market: detachable tablets.

Despite the overall tablet sales drop of nearly 14% last year, detachable sales hit an all-time high of 8.1 million devices shipped. Microsoft's detachable Surface line-up seems to have struck a chord with consumers, because "end users are seeing those devices as PC replacements," according to IDC. Apple's iPad Pro, though a bit later to join the detachable party than Microsoft, was the "clear leader" in sales this past holiday season.

Specifics aren't available, but IDC estimates that Apple sold a little over 2 million iPad Pros last quarter, slightly ahead of Microsoft's 1.6 million Surface devices. Perhaps Apple's uptick in detachable tablet sales is the reasoning behind Cook's recent assertion that tablet revenue will turn around by the end of this year. Problem is, for a behemoth like Apple that generated just shy of $76 billion in revenue last quarter, selling a few million iPad Pros won't move the needle. But it is a step in the right direction.

What's next?
In a recent "town hall" type discussion, Cook said that Apple is considering a low-cost iPhone model to address the one remaining smartphone growth area: emerging markets. Apple's stubbornness in avoiding the opportunity that smartphones aimed at emerging markets represents has never made much sense, other than reinforcing some pundit's views that its ego is getting in the way of growth opportunities.

On the innovation front, rumor has it that both the Apple Watch and TV set sales records last quarter. Apple doesn't provide specific figures, but its "Other" revenue category, where Watch and TV are housed, jumped over 40% last quarter to $4.35 billion.

Apple's recent stock price woes should come as no surprise. As many of us have suggested for the last couple of years, relying so heavily on one market -- high-end smartphones -- to drive growth was an accident waiting to happen. Now toss in a rapidly declining tablet market, and Apple bears would seem to have all the ammunition they need. But if Cook introduces a low-cost iPhone to emerging markets, and Apple's Watch, TV, and budding Services revenue continue to climb, 2016 may not be the disaster so many pundits are suggesting.

 

Tim Brugger 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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