One Word Separates Apple From $500

| About: Apple Inc. (AAPL)

The word is Phablet.

A phablet is a tablet computer small enough to hold in one hand and to make phone calls with.

Samsung (OTC:SSNLF) pioneered the phablet a few years ago, in the form of the Galaxy Note, which runs Google's (NASDAQ:GOOG) Android system. The idea was that Chinese consumers might buy a tablet, or they might buy a phone, but they couldn't afford both.

It was one of the smartest business moves of the last decade.

Phablet sales are phabulous. My best friend just bought a phablet after looking at both phones and tablets. He said he doesn't make that many calls, that the phablet lets him download video and acts as a road computer. He is phantastically happy.

IDC has just put some numbers on this and the answers to Apple (NASDAQ:AAPL) seem obvious.

The headline most media is going with is that tablets will outsell laptop PCs this year, and will outsell all PCs in 2015. IDC said just in December that 172.4 million tablets would be sold this year. The new estimate is 229.3 million.

More important is the distribution of tablets by size. Just two years ago nearly three-quarters of all tablets were 8-11 inches on the diagonal, like the 9.7 inch Apple iPad 2. Now over half are 8 inches or smaller, like the Samsung "phablets." (The iPad Mini barely breaks into this market at 7.9 inches.)

The answer to Apple is very simple. The Apple Mini needs to get mini-er. Put out a Mini the same size as a Galaxy Note, add the circuits needed to handle telephony, use a cheap plastic case so it can sell at the low end of the Chinese mass market, and you have a killer product.

How killer? Despite all the talk about Apple "losing it," its Apple Stores are still setting records in terms of sales per square foot, and sales per customer visit. That's without the product that consumers most want right now and without Apple participating in the value end of the market.

With a little effort, Apple can easily participate in that value end with a phablet and make similar margins to those it's used to. Its name is still worth more than that of Samsung, and iOS has been taking share from Android in the U.S. market.

Announce a cheap phablet, say in July, when Apple usually makes product announcements, and the next sound you will hear will be the stock is selling at $500/share.

In short, Apple doesn't need to invent a new category, just capitalize on one that's already been invented.

Disclosure: I am long AAPL, GOOG. 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.