The Apple iPad Mini Is No Cannibal

| About: Apple Inc. (AAPL)

The iPad Mini is Apple's (NASDAQ:AAPL) latest blockbuster product. In terms of physical dimensions and price, this machine bridges the gap separating the iPhone from the traditional iPad 2 and iPad with Retina display tablet platforms. Apple engineers have introduced an iPad Mini to market that operates in direct competition against the Google (NASDAQ:GOOG) Nexus 7 and Amazon (NASDAQ:AMZN) Kindle Fire tablets.

All reports project strong iPad Mini sales throughout this Holiday Season and into the first calendar quarter of 2013. Apple is likely to sell 10 million units of the iPad Mini this calendar year, which would place this product atop the 7-8-inch tablet market. Apple detractors, of course, maintain that iPad Mini sales performance comes at the expense of the traditional iPad tablet. A review of tablet technical specifications and market surveys, however, reveals that the Apple iPad Mini is no cannibal. In the near term, the iPad Mini is complimentary to, rather than parasitic of Apple's current operations playbook.

Tablet Specifications

The Apple iPad Mini is more complex than merely a larger iPhone or a smaller version of the traditional iPad tablet. The iPad Mini technical specifications reflect Apple's dedication to build out new product from the ground up. The iPad Mini weighs in at 312 grams and stands 7.87 inches in height by 5.3 in width. The iPad Mini features a 7.9-inch screen, as measured diagonally. For the sake of comparison, the traditional iPad weighs in at more than 600 grams and features a 9.7-inch screen on a 9.5-inch by 7.3-inch screen. Juxtaposed against these traditional tablets, the iPad Mini is obviously notable for improved portability. The iPad Mini is easily stashed in a backpack or even a large pocket.

The iPad Mini lacks Retina display clarity. Still, iPad Mini screen imagery appears sharper than that of the iPad 2, in large part due to the newer product's smaller size. The iPad with Retina presents images at 2048 by 1536 resolution at 264 pixels per inch (ppi), while the iPad Mini and iPad 2 both offer 1024 by 768 resolution. Enhanced picture quality for the iPad Mini relative to the iPad 2 supports improved recording, video conferencing, and picture taking capabilities. Gamers, of course, will still prefer the larger screens of the traditional iPad platform. Lastly, the iPad Mini makes for an ideal eReader. The popularity of Apple ecosystem iOS and applications are a direct challenge to the Amazon Kindle and Barnes and Noble (NYSE:BKS) Nook product lines.

16 GB Wi-Fi iPad Mini, iPad 2, and iPad - Retina retail for $329, $399, and $499, respectively. Cellular connectivity will cost an additional $130 upon each line of product. The Google Nexus 7 and Amazon Kindle Fire HD both begin at $199. For the last fiscal year 2012, Apple posted 27% profit margins. These results highlight a trend of consumer willingness to pay top dollar for Apple brand appeal.

Market Surveys

The iPad Mini will expand Apple's immediate tablet market share in the aggregate. The iPad Mini can attract value-oriented individuals, who may covet the Apple brand. Premium consumers will still move up-market and purchase traditional iPad machines. The iPad Mini effectively represents a logical progression in line with the iPod Nano and MacBook Air evolution. Apple regularly goes small and thin to serve its marketplace at multiple price points. Apple iPod and Mac overall sales grew through several successive updated releases along each respective product line. Sales of these platforms did not begin to stagnate and decline until after Apple unveiled the game changing iPhone and iPad platforms in 2007 and 2010, respectively.

Tim Cook, CEO, proclaims "We provide an incredible fourth generation iPad, iPad Mini, and iPad 2. Customers will decide which one, or two, or three or all four they would like and will buy them." Cook intimates further that Apple prefers to take on the risks of cannibalizing its own product through innovation, instead of resting upon its laurels and effectively inviting competitors to steal share. If anything, the iPad Mini will serve as another gateway for consumers to enter Apple's integrated and closed circuit of entertainment, telecommunications, and computing.

Equity analyst Katy Huberty dismisses concerns regarding the cannibalization of traditional iPad sales as "overblown." Cupertino engineers are growing total share, rather than competing against their own selves over a shrinking Apple pie. A recent Alpha Wise and Morgan Stanley survey of more than 1,000 consumers estimates that 47% of prospective iPad Mini consumers will be new to Apple's tablet platform. The same research report also indicates that Apple maintains the highest retention rate within the tablet industry - with 81% of iPad owners expressing loyalty to the product. Alpha Wise and Morgan Stanley project that Apple will preserve its leading 50% share of the U.S. market heading into next year.

The Apple iPad Mini is no cannibal.

Investment Strategy

Over the past calendar quarter, Apple shares have declined sharply off an all-time mark at $705 down to $520. Apple stock has been ripe for a sell off, as fiscal cliff concerns are now coming to a head. For wealthier investors, taxes on long-term capital gains may promptly increase to a 39.6% rate into 2013, which is more than double today's maximum 15% levy. Portfolio rebalancing and tax based selling have worked in conjunction to accelerate Apple's decline beneath fair value.

On October 31, Apple filed its Form 10K annual report with the SEC for 2012 fiscal year ended September 29. Apple closed out its latest 2012 fiscal year with $121.3 billion in cash and securities on the balance sheet. This cash position effectively backs $57.9 billion in total liabilities above 929.3 million shares outstanding. Apple therefore now operates with at least $64 billion, or roughly $70 per share in net liquidity.

Last fiscal year, Apple reported $50.9 billion in cash flow from operations. In terms of discounted cash flow, this performance is worth $727 billion when capitalized at a 7% rate. Apple's business is now worth nearly $800 billion in fair value, or approximately $850 per share. Apple stock, of course, will never retrace back towards fair value if a Black Swan economic event inhibits future sales and executives fail to innovate fresh product going forward. No perfect algorithm exists to place a price tag upon Silicon Valley ingenuity.

To best manage prospective risk versus rewards, conservative investors should consider limiting Apple stock exposure to less than 10 percent of their overall portfolio. Investors can build out an Apple stock position with weekly purchases throughout this Holiday Season and into Spring 2013. Apple maintains technical support at $500, but may quickly break down to $450, if and when share prices drop beneath the key $500 psychological barrier. Patient investors, of course, can collect upon a 2% dividend yield while waiting for Apple stock prices to recover.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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