Add Microsoft (NASDAQ:MSFT) to the long list of companies facing a competitive threat from Apple’s (NASDAQ:AAPL) popular iPad tablet. The iPad competes directly with netbooks, a class of low-priced sub-notebook computers for which Microsoft is the dominant operating system provider.
After growing at a torrid rate through the first quarter of 2010, global netbook sales have slowed lately in part due to consumers choosing to buy iPads instead of netbooks. We believe that this cannibalization effect could create a modest downside to the $28 Trefis price estimate for Microsoft’s stock. Our analysis follows below.
iPad up, netbooks down
We expect annual notebook and netbook sales to increase from 176 million units worldwide in 2009 to around 313 million by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own notebook and netbook sales forecast and see how it impacts Microsoft’s stock price.
Although the overall PC market grew by around 22% to 24% in the second quarter of 2010, netbooks sales have slowed of late despite their low price points (between $300 and $400). Global netbook sales growth slackened to around 20% in the second quarter of 2010, down from more than 70% in the fourth quarter of 2009 and the first quarter of 2010, according to Gartner, a tech industry research consultancy. This suggests that the iPad has started to cannibalize netbook sales.
This trend seems likely to accelerate as Apple reduces iPad prices over time. We expect average iPad pricing to decline from $600 in 2010 to around $440 by 2016, still higher than current netbook prices.
However, price is not the only differentiator. The iPad’s fast processor, abundant software, better browsing experience and higher-quality video playback make it a formidable threat to the typical netbook.
These factors suggest that Microsoft’s netbook operating system business will suffer significantly from the iPad’s rise. Assuming that the iPad’s popularity continues to grow, we believe that consumers could choose iPads over netbooks in sufficient numbers to knock 2% off our price forecast for Microsoft.
Separately, we have reduced our Microsoft estimate from $32 to $28, mainly because EBITDA margins have declined for the company’s flagship Windows division due to stagnant revenues and rising expenses associated with the launch of Windows 7.
You can see the complete $28 Trefis price estimate for Microsoft’s stock here.
