As Apple (AAPL) was set to release its robust A7-powered, lighter, more attractive iPad Air, IDC came out with an estimate that of the 47.6 million tablets shipped in 3Q13, Apple reported only 14.1 million shipments in its last quarter, which is only a 29.6% share of total industry shipments in 3Q13, down from 32.4% in 2Q13 and 40.2% share in 3Q12.
The tepid 3Q13 shipments received a bear analysis piece from a Vivek Gupta, whose conclusion was that Apple's iPad is "heading towards a much worse fate" than its smartphone unit because the "company is not only losing its market share but also is facing the muted growth in the number of unit shipped."
Apple has gotten many such bear arguments lately - with the sole focus on market share of some total product industry categorized by some third party or analyst, leading to the assumption that Apple is in a desperate state quickly losing market share of some rapidly growing industry. In actuality, most of such market share arguments are entirely flawed as I will further explain.
Should all tablets be treated the same?
Let's take IDC's market category of the tablets for example. A simplistic assumption is made by IDC that all tablets should be placed in the same one category - tablets - and with the iPad's premium pricing, this general assumption inevitably places the iPad at a "units shipped" market share disadvantage to peers - because Apple's tablets only appeal to individuals whose affordability levels allow them to purchase premium products. Let me explain what I mean.
Let's take China for example and borrow from a point I made in my earlier article, Apple's Story: Only the Beginning?
In the article, I noted that Apple still has an enormous unfulfilled smartphone market opportunity in China (when, for example, additional China networks become compatible with Apple's 3G/4G capability). But another point I made in the same article is relevant to this iPad argument. China currently has a population of 1.35 billion. In 2005, 32% of China's income share was held by 5% of China's population and 48% was held by the highest 20% of the population. This suggests that the majority of China's population will not be buying Apple's premium products and would prefer to buy cheap knock-offs or heavily discounted, lower margin, bottom-tier products. Apple can live with that. Let me rephrase that. Apple prefers to live with that. Apple's focus is not on the 80% who can't afford premium products. With their #1 global brand, Apple does not need to heavily discount its products to appeal to the masses. Instead, Apple would prefer to appeal to that 20% of China, or people looking to buy premium products.
IDC then publishes its simplistic and flawed tablet market share statistic and in it indicates that Apple is losing market share in the tablet category, something that is clearly inevitable in a world of cheap knock-offs and low margin products, as Apple only appeals to a much smaller portion of the global population as noted above.
This is an example of an extremely flawed framing view painted by a third party. An analogy would be an expectation that as the auto market matured, BMWs should have been sold in the same quantities as Hondas (HMC), an impossible feat to accomplish because of the companies' entirely different strategic efforts. BMW does not necessarily target the same consumers as Honda just like Apple does not necessarily target the same consumers as Samsung. But this of course does not mean that BMW can't be more profitable than Honda simply because they are in different tier categories.
Segregating into premium, mid-range, and bottom-tier categories would completely transform these market share views. Automatically, Apple would have almost 100% of the premium tablet market with no other competitors in sight.
Sure, Apple could reduce its gross margins to a mere 10% and rapidly increase market share. This would lead to smaller near-term cash flows and weaker future products and it would also destroy Apple's premium brand quality. Instead, Apple's current strategic focus appears to be one in which the company is sacrificing volume in exchange for higher near-term margins with the goal of higher near-term positive cash flows that can contribute towards creating robust premium near-term future products that are the highest of quality in the industry as I'll show below.
Coinciding with the iPad release came out another interesting ranking. J.D. Power released its 2013 U.S. Tablet Satisfaction Study.
In it, Apple's iPad was the only tablet to score perfectly in every category with the exception of cost, yet Samsung beat Apple with a higher overall score even with its "about average" performance score. To have an "average" performing product beat out "the best" performing product to me seems like a non-starter. It's like saying that a Kia (OTC:KIMTF) Rio beats the BMW 7 Series class simply because it costs less. In 2013, I'd expect a more robust survey from a professional surveyor.
Again, segregating the surveys into two or three categories would inevitably create completely disparate results. Immediately, Apple would easily win the premium brand tablet competition with its perfect scores in every category, while Samsung, even with its about average performance could win the mid-range tablet ranking because it's competing with other average performers.
This again has to do with framing. You could frame that Apple is a huge winner because it's a superb premium brand or that Apple is a loser because it's a superb premium brand. J.D. Power chose the latter.
Is Apple really shipping less units?
In his second argument, Gupta tries to prove that Apple is shipping less units by cherry picking a few recent quarters, but his analysis is extremely flawed, once again. He simply takes quarterly shipment figures and assumes that Apple is experiencing a linear decline in shipments without considering that Apple's refreshes only happen about once a year. For example, when Apple released the last tablet, iPad 4, in the beginning of 1Q13, it had massive Y/Y growth in 1Q13 and 2Q13, pointing to Apple's extremely hot product that fulfills massive demand earlier on in the refresh cycle. If only all companies had such problems. Following 2Q13, Apple experienced relatively weak Y/Y numbers (-14% and +3% in 3Q13 and 4Q13, respectively) as expected (since much of the demand was fulfilled earlier in the cycle). Gupta cherry picked the last weaker quarters that came directly after two very strong Y/Y quarters to prove that Apple is experiencing "a much worse fate" in tablet unit shipments.
When presenting unit shipments annually (versus quarterly), which corrects for seasonality and refresh effects, we can see that at 22% Y/Y unit shipment growth in 2013, Apple had extremely robust tablet shipment growth during this past year. This tablet unit shipment growth was even higher than its iPhone unit shipment growth of 20% in 2013.
With its newest refresh, like in previous cycles, Apple is expected to shatter records with its impressive iPad Air product since the product is now available in more global segments and more retail locations than any other product it has sold in its long history.
In the last few years, as Apple has become a market leader in the hardware space, I've noticed a lot of analysts attempting to shred Apple and frame the company as a loser in a supposed cheap-player-takes-all war. Above, I took what at first glance appeared to be a reasonable bear analysis from Gupta and showed huge holes in his argument about Apple appearing to be in a desperate market share-losing situation. In actuality, the Apple tablet is still a premium brand leader with no other player able to enter its premium tier (others are merely average performers according to J.D. Power, after all) and its unit shipment growth, at 22% Y/Y is still incredibly strong. Framing cunning arguments about Apple losing market share has become the name of the game for some analysts looking to create Apple bear arguments.
Alternatively, my last two articles on Apple, Is Apple's iPhone 5C/5S Strategy All Wrong? and Apple: $54 Billion Crash; China Segment Now Valued At $0, which I wrote after a bombardment of negative sell side and Seeking Alpha analyst opinions about the 5S/5C release, were followed by a +15% return in only 2 months and many in the analyst community changed their opinions about Apple's direction in the days following my articles (most analysts adjusted up their price targets and lauded Apple for its 5S/5C release shortly after).
In a world of extremely complex strategic corporate decision-making, we must use caution before listening to analysts bash companies after cherry picking a few weak data points to draw conclusions. This behavior is known as selection bias and it can lead to terrible investing results. In the next few weeks, I will release another article that will show how Apple is currently priced extremely inefficiently relative to peers and what the company could do to change the inefficiency even without releasing products in new categories. Stay tuned.