It seems that Apple (NASDAQ:AAPL) is not ready to relinquish its dominance in the tablet market anytime in the next 4-5 years. Market research firm Gartner expects the worldwide media tablet sales to double in 2012 over last year, and the iPad to lead the way with more than 60% market share.  It also expects tablets based on other operating systems such as Google’s (NASDAQ:GOOG) Android and Microsoft’s (NASDAQ:MSFT) Windows 8 to gain strength and take some of Apple’s share away as the tablet market matures. Nonetheless, it expects the iPad sales to increase to about 170 million units by 2016. Taking Gartner’s estimates into account, we see a 10% upside to our $550 price estimate for Apple stock, implying a discount of 15% to the current market price.
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Our conservative stance
In contrast to Gartner’s estimates, we have a very conservative forecast for the iPad, and we expect the iPad sales to reach around 100 million by 2016. This is primarily because we see Microsoft’s entry into this segment as a potential risk to the iPad. Microsoft has a much larger presence in the PC world, and corporate IT as well as home PC owners are more familiar with its Windows OS. If the company is able to leverage that strength to drum up interest in its tablets among enterprises, consumers and developers alike, it could pose a substantial threat to the iPad.
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However, Microsoft’s Windows 8 is not expected to debut until the latter half of 2012, and Android tablet sales have so far been tepid. When Windows 8-based tablets finally arrive, Apple will have a two-and-a-half year lead over them, three generations of iPads in the market, and a much larger presence in the smartphone world. This could mean that Windows 8 tablet sales are slow to pick up, and the iPad has a much longer run of success than we currently anticipate.
Upside if Gartner’s estimates play out
In a scenario where Gartner’s estimates for the iPad sales touch 170 million by 2016 and 220 million by 2018 at around a similar growth rate, our model shows a 10% upside to our current price estimate of $550.
The iPad is the second most valuable business for Apple after the iPhone and, contrary to what most might think, it accounts for just under 13% of Apple’s value presently. But if the iPad sales grow at the rate that Gartner forecasts, it could command more than 20% of Apple’s value, all else equal.
If the iPad is able to dominate sales well into 2016, there is no pressing need for the company to reduce prices in order to compete. Gross margin may therefore not see as much decline as we currently anticipate. A more conservative estimate of iPad’s gross margin decline could lead to a greater stock upside.
Tweak the graph below to check your own estimates for the iPad’s gross margin and the corresponding change in the price estimate.Notes: