Motorola Mobility Betting Big on High End Tablet Customers

Motorola Mobility (NYSE:MMI) introduced the Xoom tablet for a retail price of $799 last month. In comparison, Apple’s (NASDAQ:AAPL) iPad 2 was launched at a retail price of $499. From this data, consumers might think that the iPad 2 is much cheaper than Motorola Mobility’s Xoom tablet. However, there are a number of feature differences between the Xoom and the basic iPad 2 that can explain the discrepancy. ^[1] For example, the iPad 2′s basic version comes with Wi-fi and 16 GB memory, while Xoom comes with 3G network compatibility and 32 GB memory. Apart from Apple, Motorola Mobility also faces stiff tablet competition from Research in Motion (NASDAQ:RIMM), Samsung, Dell (NASDAQ:DELL) and LG.

Although the product was only recently introduced, Xoom tablet sales account for almost a quarter of the company’s stock value based on our discounted cashflow analysis. To be more precise, Xoom represents 22% of our $25.45 price estimate for Motorola Mobility stock, which is in line with the stock’s market price. Interestingly Motorola Mobility’s stock price has declined from around $30 following the announcement of the iPad 2.

Could Xoom Sales Grow in Line with the Overall Tablet Market

Main differences between the high and low end of the tablet market are memory capacity and network. The high end might be around 32 GB of memory vs. 16 GB for the low end. A high end device might also support 3G or 4G networks while low end tablets mainly support Wi-fi. The average consumer often refers to these feature differences as “pricing”.

Motorola Mobility’s Xoom has comparable features and pricing to the high end version of Apple’s iPad 2. The question now becomes, will the high end of the tablet market keep pace with the low end? This is a critical question from Motorola Mobility’s perspective, as Xoom really only caters to the high-end market.

According to a report from a market research firm Instat, the number of global Wi-fi hotspot sessions could grow from 2 billion in 2010 to about 11 billion by 2014. ^[2] The increasing availability of Wi-fi could diffuse the value proposition of high-end tablets and shift more consumers towards low end models, an undesirable outcome from Motorola Mobility’s perspective.

Given these factors, we are conservative in our estimates for the company’s tablet unit sales and predict growth at a relatively slower pace than the overall market. According to market research firm IDC, the overall tablet market is expected to grow from 17 million in 2010 to 71 million in 2012. ^[3] We currently estimate that Motorola Mobility will sell about 4 million Xoom tablets in 2011 and grow annual tablet unit sales to roughly 8.5 million by the end of our forecast period.

You can drag the trend line in the interactive chart above to see how your own forecast for Motorola Mobility’s tablet sales could impact the company’s stock value.

See our full analysis and $25.45 price estimate for Motorola Mobility

1. Analysis done by Brett Arends: How the iPad 2 could cost you more than the Xoom, March 8th 2011 [↩]
2. Instat report: Wi-Fi Hotspot Sessions to Grow to Over 11 Billion by 2014, December 2010 [↩]
3. IDC: Tablet market forecast, January 2011 [↩]