Xoom Could Take a Bite Out of iPad’s Profitability

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When Apple (NASDAQ:AAPL) introduced the basic version of the iPad 2 for $499, it looked like a bargain compared to Motorola Mobility’s (NYSE:MMI) Xoom, priced at $799. But according to one analysis, it could be the Xoom tablet that is more cost effective. For example, the iPad 2’s basic version comes with Wi-fi and 16 GB of memory, while the Xoom comes with 3G network compatibility and 32 GB of memory. [1] Maybe the iPad 2 will face stiffer competition from Xoom in the high-end tablet market than originally thought. Beyond Xoom, Apple will have to contend with a slew of other tablet players like Research in Motion (NASDAQ:RIMM), Samsung, Dell (NASDAQ:DELL) and LG.

Here we take a look at how the Xoom could potentially shift the outlook for Apple’s profitability from iPad sales. We estimate that iPad sales account for roughly 7% of our $420 price estimate for Apple. Our price estimate implies a roughly 20% premium to the stock’s market price.

iPad Can Still Dominate the Low End of the Tablet Market

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Since the pricing of the basic iPad 2 is still an attractive selling point, Apple is bound to dominate the low end of the tablet market. Given that the Xoom really only competes with the iPad 2 in the higher end of the market, our forecast of 24 million iPads sold in 2011 could still prove conservative.

High End Tablet Market is Also Key for Apple

Although offering a cheaper version of the iPad generates more unit sales, Apple records greater profitability from higher end models. For example, iPad’s 32 GB version is priced $100 higher than the 16 GB version, but doesn’t cost much more for Apple to build. [2]

Hence, increased competition in the high end of the tablet market will hinder average pricing and margins for Apple’s iPad business segment. Our interactive forecast chart above illustrates this effect, seen as a projected decline in average iPad pricing. However, intensified competition could spur further downside to our base case forecasts.

See our full analysis and $420 price estimate for Apple

Notes:
  1. Analysis done by Brett Arends: How the iPad 2 could cost you more than the Xoom, March 8th 2011 []
  2. iSuppli report: Mid-Range iPad to Generate Maximum Profits for Apple, February 2010 []