IPad Pro: How Much Revenue Can It Generate For Apple?

  • Investors have lost all faith and confidence in Apple.
  • However, there's little reason to substantiate those fears, as outward assumptions on growth seem depressed and upside catalysts to earnings and sales have emerged.
  • Furthermore, the various factors sustaining the companies success have remained constant, and that a competitive durable advantage seems sustainable in light of recent innovations.
  • I anticipate that the iPad segment will generate substantial year-over-year growth due to the product's characteristics, broader growth trends in 2-in-1s, and the pricing of the product category.
  • I also anticipate that the management team may be slow to respond to demand and may not have enough spare capacity to meet demand.

Following the Apple (NASDAQ:AAPL) September 9th event, I started to become a little more optimistic on the company despite the lack of new product category announcements. Needless to say, the expectations for growth seem very muted going into FY 2016. Furthermore, it seems like investors have either given up or have lowered expectations on price momentum going forward.

9-30-14 AAPL pic 1

The market has given investors a much more opportune time to buy Apple stock despite the uncertainty surrounding the long-term growth potential of aging product categories like the iPad and iPhone.

I will explain the potential upside to the iPad throughout the course of this article. Just know that the stock is pretty cheap and opportunities like this don't come around that often.

Addressing the expectations

The average estimate for next year sales growth is 4.8% year-over-year, and given Apple's historic growth rate it seems a bit low. At this point, analysts may be anticipating too much deceleration in terms of sales, as the product categories while mature have not reached full market saturation. Furthermore, there seems to be a lot of demand for Apple branded products, as there's been a lot of upward momentum in premium product categories in both the smartphone and PC/tablet space. As an extension to that argument, I believe that price-sensitive consumers can overcome that sensitivity to pricing assuming the marginal value creation can exceed the pricing dynamics of demand. In other words, it's an economist's way of saying that the current upgrade cycle may result in higher demand due to an improvement in product specification and features, and will result in less price sensitivity.

After looking at the price elasticity of demand for computers, it has extremely high elasticity amongst a variety of products and services. Demand tends to drop by two times as pricing increases, and it's why Apple occupies 5% of the PC market in terms of shipments. In the case of smartphones; saturation seems to be concentrated more heavily in developed markets. The marginal value creation from a high-end to a low-end device is high, and it's why consumers tend to exhibit less price sensitivity assuming the consumer has the means to purchase a high-end smartphone.

Market share trends a red herring

Apple will never win in terms of market share, but will continue to dominate in the higher-priced categories, which also explains why Apple generates 92% of the industry's profits, and has 90% market share for phones above $600 according to the 3rd quarter earnings conference call.

To generate this level of profitability Apple tends to focus more on the consumer experience and works backward based on the needs of consumers in order to determine the type of products they want to design and sell. This is why many within the tech community tend to have a very difficult time predicting what Apple will do next, and often over-estimate the impact of nascent technologies. Furthermore, patent applications don't always indicate that Apple is trying to implement the patents inside of future products, and because Apple is very focused on creating a unique and proprietary user experience you're more likely to see changes in terms of the software more so than hardware going forward.

However in this specific generation, force touch seems to be a game changer, as it impacts both the hardware and software layer and introduces an alternative form of interacting with smartphone devices. Apple has patented this technology and it will be interesting to see how other tech companies will either emulate, copy, or create an alternative form of interaction with devices that will be very similar all while avoiding patent infringement.

Technology a key driver to growth

The transition to iOS 9 and the haptic feedback engine are likely to render older generation devices obsolete relatively quickly as applications continue to optimize around the differences in iOS 9. Therefore, the real theme to this year's product has been user interface, and less so about hardware. Implementing a stronger aluminum body, and creating a rose gold model for Chinese consumers is probably the most noteworthy aspect when it comes to design.

Apple continues to support older devices with software updates that tend to improve security and speed with zero compromises to compatibility with applications and other peripheral devices. As many of you are well aware, compatibility is a huge issue, and ensuring long-term stability in products and services has not been a strong point when it comes to either Windows or Android devices. It's why Apple has a relatively strong resale market and has high resale values. So even if Apple cannot appeal directly to consumers by pricing at retail to match Windows PCs and android devices, the older devices continue to have a life of their own as they transition to new owners who tend to be much more frugal.

I recently made a forecast that the iPad Pro should be able to generate 58.8 million in unit shipments based on the pricing elasticity of computing devices in general. This is because, the iPad Pro seems like a computer replacement, and as such, it is a near full-feature device, which is why consumers will respond similarly to price as if it is a 2-in-1 PC purchase.

The iPad Pro is substantially cheaper and because it's a sub-$1,000 device the demand should be better than what analysts and Apple's management team will realistically anticipate. I'm working off of an $800 ASP at mid-point of the pricing tiers, and as such, I anticipate $47 billion in revenue for the iPad segment. By the end of FY 2015, I anticipate the iPad segment to generate $26.341 billion in revenue, which is approximately a 19.86% year-over-year decline in sales. The reason why I anticipate the segment to generate substantial growth ($27 billion to $47 billion) is driven by rapid growth in the 2-in-1 segment of the PC market, which is based on Intel's recent comments. Also, it helps that Apple has a branding/product advantage when compared to alternative products.

Final thoughts

The incremental revenue from the iPad segment will offset any potential losses from iPhones, however, the issue with my forecast is mostly given by supply-driven factors. Apple has delayed the launch of products on numerous occasions because it was  unable to procure enough components for manufacturing to meet market demand. Therefore, while the iPad segment will generate substantial growth in the next fiscal year, the growth rate could be off, as the company will not anticipate a massive uptake in demand as they move down the pricing tiers for PCs.

Alex Cho Alex Cho   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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