MorningWord 7/30/14: iPad Bro? $AAPL

by Dan July 30, 2014 9:36 am • Commentary

Apple’s last new product introduction was in April 2010, more than 4 years ago… with the press release in January of that year calling it a “Magical & Revolutionary Device at an Unbelievable Price“.  In hindsight, despite falling a tad short of curing cancer, but selling more than 200 million of the devices since its launch, demand for tablets as a category is waning, with Apple missing unit estimates for the last two quarters. From the WSJ:

Apple struggled for the second consecutive quarter to sell iPads, with unit sales falling 9.2% after a 16% drop three months earlier. In the quarter just two years ago, iPad sales were up 84%.

with sluggish demand overall in North America and Europe—the base of iPad growth in recent years. Apple said this runs contrary to strong demand in emerging markets, especially in China and the Middle East.

Yesterday LCD glass maker Corning (GLW) whiffed on their Q2 earnings expectations and offered a somber outlook for “cover-glass” demand seeing slower growth, specifically stating that “media tablet market growing slower than expected”.  GLW was down 9.5% on the weak results and outlook yesterday, giving up 4 months of gains in one fell swoop.

And then this morning, consumer electronics retailer Best Buy (BBY) asked about tablet sales by Re/Code’s Walt Mossberg, had the following to say:

Q: You said the tablet had “crashed.” Do you believe it’s going away?

A: Yeah, “crashed” is a strong word. So, the tablets have been an unbelievable phenomenon. I don’t think there’s a category that ever took off so quickly and so big in the history of tech.

The issue has then been that, once you have a tablet of a certain generation, it’s not clear that you have to move on to the next generation.

The last point is the most important one in my mind as it relates to demand in the West. The incremental improvements are just that, and they do not driving strong upgrade demand.

I have always said that the iPad is the ultimate consumer discretionary device. It serves few mission critical problems as opposed to a smartphone, but is perfectly suited to stream Netflix, surf the web or maybe read a book (indoors of course). For some it serves as a computer replacement, but for most it’s their third device. And for those that it serves as a computer replacement, what’s their upgrade cycle life like assuming they are upgrading their mobile device every few years?

It is my recollection that in the early days of the iPad, Steve Jobs even admitted that the device was best used for content consumption as opposed to creation.  That fact limits the potential life cycle of the category.

In fact, over the last 12 months, iPad units (down 2%, 68 million vs 71 million) and sales (down 5%, $32 bln vs $33 bln) have declined from the prior 12 months, which could have been the impetus for the recently announced partnership to expand iPad penetration in the enterprise.  Most analysts see this deal as mildly positive, but if I were an investor, it would say more about Apple’s confidence in their own abilities to make a bigger push on their own into business verticals.  Steve Jobs is probably rolling in his grave on this one:

steveandibm

So the main take-away here is Apple needs a fairly new revenue stream to counter-balance the declining demand and sales in one of the key pillars of their ecosystem.  I would also add that while Tim Cook suggested that demand in the West does not reflect that of the emerging markets, I would say that emerging markets is where low-end Chinese tablets and those from Samsung will compete aggressively on price, and we are very likely to see iPad margins come down substantially in the coming quarters.

So after my love-fest on Apple yesterday (from a consumer standpoint – MorningWord 7/29/14: King of the Beats – $AAPL), this morning a word of caution at a time when it feels like the entire investment community is in universal agreement that there is very limited downside in the stock heading into the iPhone 6 launch in September.