iPad 3 Success Could Spark Apple Run to $700

by Trefis Team
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All eyes are on Apple (NASDAQ:AAPL) as the company readies itself for the launch of an important product at a media event today. With speculation that the product in question could be the iPad 3, in addition to a rumored iTV, the company’s stock price has swelled by almost 15% in the past month. While the media anticipates the launch, we thought it would be prudent to go back to Apple’s model and see how the success of the iPad 3 could add to its upside from our current price estimate.

See our complete analysis of Apple here

1. Faster increase in iPad unit sales:

The iPad is the second most valuable business for Apple after the iPhone and contrary to what most might think, accounts for just under 13% of Apple’s value presently. But the fact that the iPad debuted only in 2010 and spawned a new market segment of mobile devices single handedly – a market segment that it has since dominated despite the entry of many competitors and is hence still relatively young – leaves a lot of potential for upside to our rather conservative estimates.

Gartner estimates that the tablet market will grow to 326 million unit sales in 2015, or about 50% average annual growth rate. [1] If Apple is able to grow its iPad sales at only 35% annually, its sales at the end of 2018 would be around 330 million, about three times our current estimate of 120 million. That could add an upside of 20% to our estimate for Apple stock value.

If Apple is able to replicate the iPhone success with the iPad, the upside could be even more huge. Apple’s iPhone sales have grown by an average 90% annually since 2008, the year after its debut. If Apple is able to grow its iPad sales at that rate for the next three years and then 30% until the end of our forecast period, we are looking at an upside of almost 50% from the current market price. You can move the trend line below and check out your own estimates.

However, if the nascent tablet market doesn’t take off like smartphones did, or is eclipsed by another product possibly not even invented by Apple, the above scenarios may never play out. Historically, we have seen this happen with the netbooks which never really took off as tablets such as the iPad nearly killed the market segment.

2. Slower decline in iPad pricing:

We currently forecast average iPad prices to decline to around $430 by the end of our forecast period as the iPad is part of a nascent market segment and hence subject to heavy competitive pressures from new entrants.

However, as we have seen with the Kindle Fire and the Nook, which both undercut the iPad almost to a half, the iPad’s sales were hardly affected. If the iPad continues to find as many takers as it has in the past, there may not be a pressing need for Apple to decrease its prices. Apple’s flagship product, the iPhone, has seen its average pricing actually increase since 2009.

These factors could mean that the iPad pricing could decline at a slower rate than what we forecast. There could be an upside of 8% to our estimate for Apple stock if iPad pricing declines slowly to reach about $565 by the end of Trefis forecast period.

Combine the 20% upside from our relatively conservative estimate for iPad sales to the 8% upside from slower declines in iPad pricing, and we arrive at a price estimate of $700 for Apple.

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Notes:
  1. Gartner Says Apple Will Have a Free Run in Tablet Market Holiday Season as Competitors Continue to Lag, September 22nd, 2011 []
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