Why Apple Is Going Downmarket With Its New iPad

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Apple (NASDAQ:AAPL) has introduced a new low-cost iPad to replace the aging iPad Air 2 tablet, which was launched in 2014.  The new device will have a starting price of $329, down from $399 for the Air 2, marking Apple’s lowest price point for an iPad with a 9.7-inch display. The device – which is aimed squarely at casual users – sports an improved processor compared to its predecessor, although Apple appears to be cutting costs by using an older design borrowed from the original iPad Air, along with less advanced display technology.  Below we take a look at how the new device fits into Apple’s iPad product line and its potential impact on the company’s financials.

We have a $136 price estimate for Apple, which translates into a market cap of about $710 billion. Our price estimate is slightly below the current market price.

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Catering To The Low End Of The Market

The tablet market has been contracting, with global shipments in Q4 2016 declining by about 20% year-over-year per IDC. While premium players such as Apple and Samsung saw shipments decline by 18.8% and 11.4%, respectively, value-vendors such as Lenovo and Huawei witnessed some gains. With the new iPad, Apple might be better equipped to cater to lower-end customers and first-time buyers, with the product serving as a steppingstone of sorts into the larger Apple ecosystem. This could help Apple improve its share in a shrinking tablet market.

Getting Existing iPad Customers To Upgrade 

Tablets have longer upgrade cycles compared to smartphones, as their wireless standards don’t evolve as quickly and they are generally used less frequently than smartphones. According to analytics firm Localytics, users of the iPad 2, iPad 3, and iPad 4 – devices which were launched in 2012 or earlier – account for roughly 30% of the installed base for iPads. There is a possibility that the budget iPad could help Apple stimulate an upgrade cycle of sorts for these users, bringing them up to date with Apple’s latest hardware and software features.

ASPs Could Take A Hit In The Near Term 

That said, the firm runs the risk of cannibalizing its more expensive 9.7-inch iPad Pro device, which is priced at $599. Although the Pro provides customers with a better display and cameras as well as a more powerful processor, many casual users will likely choose the new device over the Pro, bringing down iPad ASPs. Apple may also see lower sales of its high-margin accessories such as Apple Pencil and the Smart Keyboard, which are only compatible with the Pro device. That said, Apple is rumored to be upgrading its Pro lineup in the coming months, with a new device that could sport an edge-to-edge display, allowing it to create better product differentiation.

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