Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Apple Inc. (AAPL)’s iPhone, Not iPad, Will Be Key Catalyst

Page 1 of 2

The Post-Jobs Apple Inc (AAPL): Is it Still a 'Buy' One Year Later?Farhad Manjoo of Slate wrote a very interesting piece after Apple Inc. (NASDAQ:AAPL) reported earnings last week, arguing that the iPad is poised to lead Apple’s next wave of growth. Manjoo compares the iPad to the iPod, where Apple Inc. (NASDAQ:AAPL) has been able to retain a dominant market share for over a decade. He claims that the iPad will perform similarly for Apple, while the iPhone has already lost its dominant position and will remain a niche product, albeit a highly profitable one.

However, while the iPad has solid growth prospects, the iPhone will still be the primary driver of future revenue and profit growth for Apple. The need to partner with wireless carriers to drive iPhone sales has resulted in lumpy growth, but it also means that there is a significant unaddressed market for the iPhone. Moreover, the iPad Mini was recently released as an entry-level tablet, and Apple Inc. (NASDAQ:AAPL) is likely to introduce a similarly cheap iPhone in the next year or so. In fact, iPad growth may already be close to its peak; by contrast, iPhone unit growth is likely to reaccelerate when Apple adds new carrier partners and/or creates a cheaper phone. This ensures that the iPhone will remain the top dog for Apple Inc. (NASDAQ:AAPL).

The argument
Manjoo’s argument is fairly simple. First, he states that the iPad has already hit an affordable price point with the $329 iPad Mini. While Google Inc (NASDAQ:GOOG)‘s Nexus 7 and Amazon.com, Inc. (NASDAQ:AMZN)‘s Kindle Fire are significantly cheaper, Manjoo points out that Apple Inc. (NASDAQ:AAPL) has 350,000 apps customized for the iPad, leaving Android tablets in the dust. Manjoo argues that this large app ecosystem locks in customers and developers; customers will want to keep buying iPads so they can keep their apps, and the large base of app-hungry users will encourage developers to focus primarily on iOS.

The iPad Mini. Source: Apple.

Manjoo also notes that Apple’s iPad sales grew 65% last quarter, while iPhone sales grew just 7%. He notes that if that pace continues, iPad could overtake iPhone as Apple’s best-selling product by 2015. Manjoo also points to IDC’s five-year outlook, which shows the iPad having 46% of the market in 2013, and 43.5% in 2017. All in all, Manjoo believes that the iPad’s strong positioning in the tablet market provides a long runway for growth.

iPhone is still king
The first apparent flaw in this analysis stems from the fact that, despite the iPad’s recent growth, Apple Inc. (NASDAQ:AAPL) sells many more iPhones than iPads at present. Even after iPad unit sales grew 65% last quarter, it was still outsold nearly two-to-one by the iPhone. iPad’s growth in 2013 is coming off of a base of 58 million units sold in the most recent fiscal year; however, it is important to remember that the iPhone generated 73% unit growth just last year, growing from a little more than 72 million unit sales in FY11 to 125 million in FY12.

In other words, it is relatively easy to generate impressive percentage growth up to a point. Eventually the market becomes saturated, though, and growth tends to hit a wall. This trajectory is reflected in the IDC numbers Manjoo cites, insofar as IDC projects a compound annual growth rate of just 15% for the iPad over the next five years. At that pace, the iPad would not even hit today’s iPhone sales rate at the end of the forecast period.

Page 1 of 2
Loading Comments...