With its sights firmly set on Microsoft (NASDAQ:MSFT) and the huge PC market, Apple (NASDAQ:AAPL) added another important update to its growing iPad collection. The iDevice maker recently launched a 128 GB update to its Retina display-toting fourth-generation iPad, doubling the storage capacity of its earlier highest-end tablet for an additional $100 in price. The premium device is not just Apple’s way of protecting margins and ASPs in the wake of the iPad mini’s increasing sales mix. What we are also seeing here is a bigger market share play going on as tablets eat away into PC shipments.
That Apple is looking to upstage the PC giant becomes evident when we consider that Microsoft is launching its own tablet PC, the Surface Pro, in a couple of days. By launching an iPad with the same storage option as the Surface Pro, Apple is effectively positioning the high-end iPad as a computer replacement. In fact, the opportunity that lies in the nascent tablet market is so immense that Apple doesn’t mind cannibalizing its own computer line, the Mac. At $799, the 128GB iPad is just $200 cheaper than the entry-level MacBook Air. The iPad mini’s launch late last year showed that Apple wasn’t going to shy away from providing users options and defending its early market share lead. The 128GB option cements that opinion further.
Apple eying PC market
It is not very surprising why Apple is doing so. While the PC market has stagnated in recent years, the tablet market has ballooned from nothing before 2010 to an estimated 120 million unit sales in 2012. It also doesn’t seem like a mere coincidence that the anemic growth in the PC market sales followed Apple’s iPad launch in 2010. PC shipments in the three years before and including 2010 grew at a CAGR of more than 10%. Since then, the growth has been less than 2% a year by our estimates. It was widely believed that the Windows 8 launch could spark a period of frenzied buying but Gartner’s recent estimates for Q4 2012 show that sales have in fact declined close to 5% y-o-y.
The writing on the wall could not be clearer. Even Apple’s famed Mac line of products, which had benefited from the halo effect of its mobile devices, saw a big decline last year. After growing Mac unit sales by a CAGR of over 23% in the four year period until 2011, Apple saw its PC sales decline by over 4% in 2012, by our estimates.
It is due to this cannibalization of the PC market that we estimate the iPad to be the second most valuable division for Apple, after the iPhone. Currently, the iPad accounts for just under 12% of our price estimate for Apple, but if the nascent market sees an explosion in demand over the coming quarters, the iPad could command a bigger chunk of our estimate.
Upside to Apple
Gartner estimates that the iPad market will grow to about 170 million unit sales in 2016, at an average of about 35% annual growth rate.  We are a tad more conservative in our estimates in assuming that the growth rate will be closer to about 20% hereon. However, if iPad sales match Gartner’s projections, possibly due to an increase in demand for the smaller form-factor iPad mini or the availability of more storage options down the road, there could be just about 3% upside to our price estimate.
Also, we currently estimate that Apple’s margins on the iPad will drop to about 20% in the long run due to increasing competition from low-cost options such as Google’s Nexus 7 and Amazon’s Kindle Fire. However, if tablets are increasingly perceived as replacement for laptops or netbooks, the demand for its higher priced offerings with more storage such as the recently launched 128GB iPad could increase. This will help support margins better, and so if margins decline to only about 25% by the end of our forecast period, the total upside could be about 5%.Notes:
- Gartner Says Worldwide Media Tablets Sales to Reach 119 Million Units in 2012, April 10th, 2012 [↩]