Apple IPad: A $11.6 Billion Profit Potential In 2015

  • The Apple iPad may contribute $11.6 billion in profit in fiscal year 2015.
  • iPad sales have stagnated over the past three years indicating that a massive refresh is due.
  • Apple is set to release a larger iPad, which consumers have shown significant interest in.
  • Assuming a combination of refresh and higher ASPs, the iPad segment may drive significant revenue/earnings growth on a consolidated basis.

Apple iPad potential

Apple (NASDAQ:AAPL) is set to reveal the new iPad model at its upcoming October 16 event, and it’s likely that investors/analysts will be watching the event intently to see if Apple can create any new or additional innovations that can differentiate the product from the Apple iPhone, or at least introduce compelling features unique to the product that can lead to product refresh. Much of Apple’s upside growth prospects hinge on whether the iPad can retain consumers whenever they update the device, and assuming Apple is able to do this, the stock will have even more upside.

Quoted from my earlier post on Amigobulls:

Shipment figures may be higher by as much as 50% over the prior year comp. This is because a combination of new customers paired with refresh from the pre-existing installed base should drive significant volume growth. The current ASP figures for iPads are $443 (combining the iPad mini with iPad). Therefore, if shipment figures grow to 105 million units in fiscal year 2015, revenue from the iPad segment may in fact reach $46.5 billion.

Based on my current estimate, which is not inclusive of the impact from a larger form factor iPad, I calculate that the iPad may contribute $9.3 billion to $11.63 billion to Apple’s bottom line results in fiscal year 2015. Assuming, Apple’s iPhone 6 and 6 Plus launch results in 200 million + units, Apple’s upcoming fiscal year will be significantly better than the prior years.

Apple revenue chart

As you can tell, Apple’s revenue growth has stagnated over the past three years. So a meaningful boost in revenue and earnings, will significantly improve investor sentiment, and will attract many more institutional investors. The lack of revenue growth was partially driven by the lack of volume growth in the iPad segment, and worsening ASP trends following the launch of the iPad Mini. However, with the launch of a larger form factor iPad (12.9 inch form factor), the trend in both ASPs and shipment volume will improve sales at a significant rate.

iPad shipments

Source: Data from Apple, chart was created by AlexLeAnders

As you can tell, by the above graph, shipment growth between Q3 2012, Q3 2013, and Q3 2014 stagnated. However, according to Tim Cook, Apple has been able to attract new buyers, but wasn’t able to convince the ones who already own an iPad to buy an updated version of one. Furthermore, according to a survey that’s targeted at more affluent teenagers, the penetration rate is very high, so refresh is a huge factor to whether Apple’s tablet segment can grow in its upcoming fiscal year.

Electronic devices penetration rate

Source: PiperJaffray

As you can tell, by the above graphic, the iPad, and iPad Mini when combined has 66% penetration among more affluent teenagers. It would take a combination of new customer acquisitions, which would come from foreign device roll-out, paired with migration of users from the low-end to high-end, along with product refresh to drive significant growth. When combining all these factors, I anticipate that the iPad segment will contribute $46.5 billion in revenue or more in fiscal year 2015.

The upcoming iPad Air 2 and refreshed Mini may have enough improvements to push consumers to buy the upcoming device. But if all else fails, the bigger iPad at 12.9 inches should sufficiently drive shipment volume. According to a CNET poll, 50% of respondents wanted to see a 12.9 inch form factor Apple iPad device at the Apple iPad event. This indicates that consumers will pay more on average in this upcoming product refresh cycle.

However the Apple iPad should come with better multi-tasking features, as the Apple iPhone 6 Plus was designed to handle split screen mode from the bottom-up. With a more intuitive user interface, and a closed ecosystem, multi-tasking could be a much better experience on iPad, when compared to Windows and Android tablets. Furthermore, there are rumors that the upcoming iPad Air 2 will come with a super high resolution display at 4k or 5k, and will also come with improved internal components along with touch ID. The device may also come with NFC capabilities, and can be used as a point of sale terminal for smaller businesses that want to be integrated into the Apple payment ecosystem. Battery life improvements, slight alternations to the design, paired with an improvement in thinness and weight should be expected with the upcoming iPad.

I have high conviction that the upcoming iPad will have meaningful impact on consolidated sales and earnings. The recent pullback will give investors an opportunity to buy the stock at a bit of a discount. Also, numerous upside catalysts will drive the stock price higher over the next three years, therefore Apple is a great buy at current levels. Amigobulls' Apple stock analysis currently has a bullish outlook on the stock.

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