Apple’s (AAPL) earnings Tuesday were impressive (see earnings call transcript here). While most of the earnings beat was driven by better than expected smartphone sales, I have to say, the iPad also seemed to have beat my expectations. Here is where I went wrong as far as the iPad, and what it means going forward.
To be clear, while I was bearish on the iPad, I was not necessarily bearish on Apple as a whole. Apple’s international smartphone sales have been impressive, and smartphone sales in the United States could have more room to grow if Apple expands to Verizon (VZ), as rumors have suggested.
Back to the self-reflection: My initial expectations for the iPad tablet were not high. As I said in that article, I would call myself out if I was wrong. Mea culpa: it may not have been so. It will take some time for me to deconstruct how much of the revenue came from iPad sales. But preliminarily, although Tim Cook will certainly only speak positively about the iPad, it has in fact performed better than I expected.
Why I dropped the ball on the iPad
Thinking back, when I was making my predictions about iPad sales, I was operating under the assumption that consumers seek to maximize utility from a selection of differently-priced goods and a limited income. In my traditional economic view, I assumed that consumers were generally rational.
That was a bad assumption. Moreover, after growing up and seeing Beanie Babies, Pokemon, Krispy Kreme Donuts (KKD) (remember them when they first came out?), bottled water that people outside of third-world Malaria zones actually pay money for, and phone ringtones that aren’t for free–I should have known better. I actually went to an Apple store recently to try the iPad, and I maintain that the keyboard and interface is clumsy, that no USB ports and no Flash support is a problem, and I maintain that it is a fundamental leap backwards in technology–a leap back to the days of watered down services like the old America Online, albeit in a prettier package. I maintain that I personally would rather get a $400 laptop, which would cost less and have much more functionality.
I maintained my initial opinion when actual initial iPad sales turned out to be significantly below the widely-quoted estimate from Piper Jaffray. Also, some of the thoroughly amusing hate mail and comments on my Seeking Alpha post reinforced in my mind the idea that this would not have too much appeal outside of the hardcore Apple enthusiast crowd.
That all said…it didn’t seem to matter. The takeaway lesson for me is to not try to bet against a consumer craze while it is still in full effect.
Going forward: Can the craze be maintained?
I found it interesting that AAPL actually sold off slightly Tuesday, despite the very impressive earnings report. It could be that the great earnings were already priced in. Investors who currently own a position that has given them a solid return might want to consider taking a profit or putting in a downside stop to lock in gains.
Another thing to consider is that while Apple’s smartphones will likely continue to impress for some time, especially with the next-generation iPhone speculated to arrive in the summer, Apple’s competitors are stepping their game up as well.
Keep an eye on the Google’s (GOOG) activity, which has been expanding into the mobile devices space. One thing that intrigues me about Google is the Nexus One smartphone, a collaboration between Google and the Taiwanese smartphone maker HTC. Sales so far of the Nexus One have been disappointing, but a company with the creativity and financial weight of Google can afford to tinker until they get the right formula. Also, Nexus One sales could probably improve if the phone was offered in plans other than just T-Mobile. According to the Nexus One website, the phone will be “Coming Soon” to Verizon and Vodafone (VOD), but no date is specified.
Apple nowadays is essentially a mobile devices manufacturer; the company brings in more revenue from smartphones than computers. Steve Jobs’ and Tim Cook’s challenge going forward will be to maintain the craze that they have built on Apple products.
I will also be curious to see iPad sales a few months from now in order to see if the device can truly get mainstream appeal outside of hardcore Apple enthusiasts and early adopters; initial sales were bound to be above average. Can the craze be maintained?