Last year, Apple (NASDAQ:AAPL) CEO Tim Cook framed the holiday season as an iPad Christmas. At that time, the technology media fired back with charges that Android and Windows tablets were finally poised to challenge and topple the iPad Empire. Amazon (NASDAQ:AMZN) itself was to suggest that the Kindle Fire HDX was technically superior and yet cheaper than the iPad Air. In retrospect, the catcalls out of Apple bears, or haters, foreshadowing a collapse in Holiday Season iPad sales will come off as somewhat laughable. On January 28, 2014, Tim Cook was vindicated with the release of Apple's Q1 2014 report that confirmed record-breaking iPad sales. Going forward, long-term Apple investors may also take solace in the idea that no Apple iPad killer will emerge throughout the year 2014.
The iPad Christmas
iPad Unit Sales
iPad Revenue Per Unit Sold
iPad % of Apple Revenue
The Apple Q1 2014 report summarized business conditions for the three-month period ended December 28, 2013. This report, of course, was a highly anticipated event throughout both Silicon Valley and Wall Street, because Apple's first quarter largely spanned the Holiday Season. Again, Apple sold a record 26 million iPads during the first quarter of its fiscal 2014, which did calculate out to $11.5 billion in quarterly income. For the sake of comparison, Apple sold 22.9 million iPads to generate $10.7 billion in segment sales through the year-over-year quarter. Taken together, the iPad and iPhone platforms have combined to generate roughly 70% of Apple income over the past three years. Apple's mobile revolution largely cannibalized the iPod, which accounted for a mere $973 million in Q1 2014 revenue.
Be advised that Apple does not specifically break down operating segment revenue according to individual product. The iPad revenue per unit sold statistic must therefore serve as a rough portrayal of the Apple product mix. The 16GB iPad Air with Wi-Fi costs customers $499.00. The fully loaded, top-of-the-line 128GB iPad Air featuring Wi-Fi and cellular connectivity now retails for $929.00. Apple first brought the iPad Air to market on November 1, 2013. For now, the older 16GB iPad Mini begins at $299.00.
Language written within recent financial reports has suggested that, over time, value conscious consumers were more likely to purchase older iPhones and iPads instead of upgrading to the latest models. Year-over-year Apple iTunes revenue also grew by nearly 20% through multiple time frames between 2012 and Q1 2014. The qualitative evidence may yet again indicate that Apple has cannibalized its own self and has not lost business to competitors. Consumers have refused to abandon the Apple ecosystem.
In terms of profitability, recent research out of IHS iSuppli claimed that Apple has leveraged its impressive buying power to drive down shared components parts between the iPhone and iPad platforms. As such, the steady decline in iPad revenue per unit sold from $666.67 to $442.31 between 2010 and Q1 2014 may not necessarily be indicative of a drop in tablet profitability. On November 5, 2013, IHS iSuppli estimated $274.00 in bill of materials and manufacturing costs for the 16GB Wi-Fi iPad Air that retails for $499.00. Apple has especially taken advantage of rapidly depreciating NAND Flash prices to assemble the 128GB Wi-Fi + Cellular Apple iPad Air for a mere $365, before hawking this product at retail outlets for $929.00. Going forward, iPad cost of sales may actually decline by another 5% through the end of 2014. Most likely, this platform will maintain 50% gross margins without any iPad killer looming upon the 2014 horizon.
The 2014 Tablet Competition
Like clockwork, the dust barely settled upon the iPad Air and its Holiday Season blowout before technology enthusiasts began stumbling over each other to predict specifications for the next iterations of the iPad tablet. Legions of technology analysts have agreed that Apple will introduce new installments of the 7.9-inch iPad Mini with Retina display and 9.4-inch iPad Air by Q3 2014, in time for the next 2014 Holiday Season. Alistair Stevenson and V3 already speculated that the new tablet machines would feature fingerprint sensory technology and even brighter resolutions. Logically, a more powerful A8 chip would be the driving force behind a 2014 iPad line recognized for long lasting battery life.
In addition to the logical extensions of the iPad line, several artist renderings have emerged anticipating that Apple will finally embrace the two-in-one movement. Intel (NASDAQ:INTC) further popularized the term "two-in-one" within its 2012 annual report. At that time, Intel was on an aggressive push to crack the mobile market through hybrid machines that bridged the gap between laptop and tablet devices. On October 26, 2012, Microsoft (NASDAQ:MSFT) brought the first Surface tablets to market, which were made complete with separate covers that doubled as kickstands and keyboards. Juan Carlos Perez and PC World have suggested that the historical rivalry between Microsoft and Apple may be made even more awkward after the alleged release of Office for the iPad by the end of 2014.
For years, Tom's Hardware and the technology rumor mill have been buzzing with speculation that an iPad Pro will ultimately emerge as Apple's latest and most functional workstation. A larger, 12.9-inch iPad Pro, when combined with Microsoft Office, would definitely fuse capabilities of both the traditional iPad and MacBook Pro together. Certainly, loyal Apple followers, or fan boys, would snap up portable devices that combine Cupertino artistry alongside Microsoft practicality like hotcakes.
Beyond Apple, the tablet competition largely branches off into Windows and Google (NASDAQ:GOOG) Android wings. Again, Microsoft is now in danger of actually undercutting its own tablet platform after the market has effectively forced it to make nice, play ball with Apple, and engineer Office software for the iPad. As far as Android is concerned, tablet market share data out of the likes of International Data Corporation will remain largely misleading. The Google Android ecosystem is actually made up of a loose coalition of companies that literally give product away at cost to drive traffic towards higher margin businesses. For example, Amazon hawks its Kindle for cheap in order to deliver more portals into the hands of consumers who will purchase e-books and durable goods through the online retailer.
Apple, as a vertically integrated technology company, will continue to take the lion's share of available profits within the tablet space through 2014. As a hardware rival, Samsung (OTC:SSNLF) still lacks the je ne sais quoi appeal of Apple. Last November, Kurt Badenhausen and Forbes Magazine identified Apple as the world's most powerful brand, which extended its run at the top to three straight years. Forbes statisticians then calculated a value of $104.3 billion for the Apple brand, which was up 20% from the prior year. The competition will not be able to overcome the Apple machine without the release of a revolutionary product. No Apple iPad killer will emerge in 2014.
The Bottom Line
Apple, again, sold a record 51 million iPhones and 26 million iPad tablets during its latest Q1 2014. Apple iPad unit sales and revenues increased by 14% and 7%, respectively, above the year-over-year quarter. In all, Apple closed out its first quarter of 2014 having banked $13.1 billion in net income off $57.6 billion in revenue. Still, Wall Street was far from impressed, as traders immediately dumped Apple shares from $547.22 to $503.49 for an 8% loss upon the January 28 release of the quarterly report. At the time, Reuters intimated that investor sales activity was a swift reaction to Apple's forecast for Q2 2014 revenue to come in between $42 billion and $44 billion. Apple actually generated $43.6 billion in revenue during Q2 2013. Wall Street traders responded to the flat revenue projection out of Apple as if it were a profit warning.
Over the next two weeks, Apple shares were to rebound sharply above $540 upon news that the company had bought back $14 billion worth of stock. A strong argument may be proposed that Tim Cook has effectively built in a $500 put within Apple stock for investors. These accelerated buybacks were executed as part of a recently announced plan to return $100 billion in capital back to shareholders through buybacks and dividends, by the end of 2015. The Apple Q1 2014 report listed $158.8 billion in cash and investments above $95.5 billion in total liabilities on the balance sheet. Apple also generated $22.7 billion in cash flow from operations through the first quarter of its 2014 fiscal year. Apple trades for a mere 11 times earnings, after backing out the massive liquidity upon its ledger.
In summary, Apple will continue to mint cash through 2014, with no iPad killer on the horizon. The iPad platform may sustain 15% unit sales and 7% segment revenue growth through 2014. Behind these growth rates, 81.7 million iPad unit sales would generate $34.2 billion in 2014 revenue for Apple. At worst, Apple could simply allocate the cash flow from these sales to buy back stock and support alpha returns. From here, a decision to buy up Apple stock may best be described as a "no brainer."
Back up the Apple cart and load up on stock.
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.