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Summary

  • Apple iPad sales growth has deteriorated.
  • Claims describing Apple as "doomed" are outrageous. The iPhone 6 will pick up sales slack.
  • Apple still deserves a buy rating.

On April 23, 2014, Apple (NASDAQ:AAPL) filed financial results for the second quarter of its fiscal 2014 with the U.S. Securities and Exchange Commission. At Apple, Q2 2014 covered the recent three-month period ended March 29, 2014. Outside of the Holiday Season, Apple CEO Tim Cook and the technology commentariat hailed Q2 2014 as the most successful quarter in the history of the corporation. Highlights of the Q2 2014 report included bottom line net income of $10.2 billion upon $45.6 billion in net revenue. The stellar financial results were largely due in part to 43.7 million in Q2 2014 iPhone unit sales. Going forward, Apple also pledged to significantly expand its capital return program -- to return a total of $100 billion back to shareholders by the end of 2015.

Wall Street was clearly pleased with the news. On April 24, 2104, traders bought Apple shares up to $567.77, for an 8.2% gain on the trading session. Still, contrarians, or haters, promptly came out of the woodwork to dismiss Apple's good fortune as being short lived. Both Haley Tsukayama of The Washington Post and Chris O'Brien of the Los Angeles Times honed in upon the "shocking drop-off" in iPad sales through Q2 2014. Apple bears have intimated that flagging iPad sales renewed pressures for Apple to deliver fresh product to market. The "Apple is Doomed" catcalls, however, will be exposed as mere conjecture. Apple remains well positioned to leverage the inevitable shift towards phablets and cloud computing within the mobile industry. The sky is not falling at Apple.

Apple iPad Sales Performance

2010

2011

2012

2013

Q2 2013

Q2 2014

Apple Revenue

$65.2B

$108.2B

$156.5B

$170.9B

$43.6B

$45.6B

iPad Revenue

$5.0B

$19.2B

$30.9B

$32.0B

$8.7B

$7.6B

iPad Unit Sales

7.5M

32.9M

58.3M

71.0M

19.5M

16.4M

iPad Revenue Per Unit Sold

$666.67

$583.59

$530.02

$450.70

$446.15

$463.41

iPad % of Apple Revenue

7.7%

17.7%

19.7%

18.7%

20.0%

16.7%

Source: Apple Earnings Releases and SEC Filings

A more nuanced review of Apple iPad sales performance figures may serve to counter the hysterical click bait headlines of Apple being "doomed." Be advised that Apple did ship a record 26 million iPads to generate $11.5 billion in Q1 2014 operating segment revenue. This iPad sales performance broke down further to $442.31, upon a per unit basis. For Q1 2014, the iPad platform actually achieved respective year-over-year 14% and 7% growth rates in unit sales and revenue. Apple's first quarter, of course, largely coincided with the peak Holiday Season. The sequential decline in iPad sales between Apple's Q1 and Q2 is part of a larger cyclical trend. The Q2 2014 figures may have been further depressed in the aftermath of "channel stuffing," when third-party retailers aggressively backed up the truck to stock shelves with iPads, in anticipation of Black Friday and Christmas demand.

The iPad Revenue Per Unit Sold is a helpful statistic to gauge shifts within the Apple product mix over time. For 2013, Apple iPad Revenue Per Unit Sold declined significantly from $530.02 to $450.70. Interestingly, Apple iPad Revenue Per Unit Sold went on to rebound sharply off $446.15 to $463.41 between Q2 2013 and Q2 2014, despite the doom and gloom rhetoric. In effect, the average consumer has been in the market for the 16GB Wi-Fi iPad Air, which retails for $499.00. Be further advised that the 16GB Wi-Fi iPad Mini retails for $299, while the top-of-the-line 128GB iPad Air with Wi-Fi and Cellular connectivity prices out at $929.00.

On November 5, 2013, research firm IHS released supple chain cost results for the iPad Air. According to IHS, the 16GB Wi-Fi iPad Air carries $274.00 in total bill of materials ($269.00) and manufacturing ($5.00) costs. The 16GB Wi-Fi iPad Air, again, retails for $499.00, which would also calculate out to $225, or 45.1% estimated gross margins per unit sold. In all, the iPad platform may have accounted for $3.5 billion of Apple's $21.8 in Q2 2014 gross margins. The IHS report also concluded that iPad bill of materials and manufacturing costs have declined by 6% over the past year. Going forward, Apple will continue to leverage its massive buying power to drive down the costs of shared iPhone and iPad component costs. Expanding iPad gross margins may buffer against slight unit sale declines.

The Phablet and Cloud Computing

The phablet and cloud computing are the next logical steps within the mobile revolution. The term "phablet," of course is a play upon the words smartphone and tablet. As such, phablets are notable for their larger screens and brighter resolutions that are more so ideal for gaming, sharing video, and reading text. Over time, premium phablets may offer productivity applications that rival basic tablet and personal computer workstations. Above all, the cloud provides consumers with access to virtual servers, from which files may be accessed from individual desktops, laptops, smartphones, and tablets across the globe. Within the past month, fierce rivals Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) finally made their Office, Docs, and Sheets productivity software available to the Apple mobile ecosystem. For its part, Apple has steadily built out its own iCloud, as an integrated storage network for iOS work and entertainment files.

Apple, of course, has maintained a well-documented history of cannibalizing its own product. The iPhone and iPad launches precipitated the obsolescence of the standalone iPod music player. For Q2 2014, Apple reported a respective 2.8 million and $461 million in iPod unit sales and revenue, which was half the production of the year-over-year quarter. In 2005, the iPod tallied 22.5 million in unit sales. At that time, the iPad generated $4.5 billion in revenue, which also accounted for 32.6% of Apple total net sales. Interestingly, iTunes, Software, and Services operating segment sales have consistently remained between 10% and 15% of company revenue over the past decade. Apple customers, or fan boys, have remained fiercely loyal to this ecosystem. As such, relatively weak iPad results should be of little concern for long-term shareholders.

Both Phone Arena and Pocket Lint identified the Samsung (OTC:SSNLF) Galaxy Note 3 as the top phablet on the marketplace heading into 2014. The Samsung Galaxy Note 3 features a 5.7-inch screen that displays graphics at 1080 X 1920-pixel (386-ppi) density and resolution. In response, MacRumors has speculated that the looming iPhone 6 launch will ultimately branch off into two separate 4.7-inch and 5.5-inch screen handsets, in a somewhat similar vein to the 5s - 5c launch.

Rather than price, the separate iPhone 6 handsets would then be distinguished according to handset size. KGI Securities analyst Ming Chi-Kuo has already projected that the 5.5-inch iPhone 6 would display images at 1080 X 1920-pixel (401-ppi) density and resolution, which would better the aforementioned Galaxy Note 3 specifications. In terms of size, the larger iPhone 6 handsets would fall between the 4-inch 5s and conventional phablet territory. The iPad Mini screen does measure out at 7.9 inches, diagonally. Still, a successful iPhone 6 launch may further erode iPad sales, as the two platforms gradually merge together. For Q2 2014, the 14% year-over-year advance in iPhone revenue to $26.1 billion more than made up for the slight dip in iPad sales performance.

The Bottom Line

Perhaps most importantly, Apple closed out its Q2 2014 books with $150.6 billion in cash and investments above a mere $85.8 in total liabilities. Within the past six months, Apple has generated $36.2 billion in cash flow from operations and also bought back at least 53.9 million shares of stock. Apple did list out 874.8 million basic shares outstanding used in computing Q2 2014 earnings per share. Going forward, Apple can lock in a semi-annual 5% improvement in earnings per share simply through buybacks. Again, Apple has already pledged to increase its capital return program by $55 billion - to return a total of $100 billion back to shareholders by the end of 2015. Of this amount, Apple has significantly expanded its pledged share buyback authorization program from $10 billion to $60 billion.

Per snapshot valuations, the May 29, 2014 balance sheet did include $8.3 billion in deferred revenue. This deferred revenue, of course, will transition over to the net income statement, which would ultimately equate to $77.5 in total Apple liabilities. In theory, Apple would be left with $73.1 billion in cash and securities, after paying off all liabilities. This liquidity position would calculate out to roughly $85.00 per share. Apple shares did close out the May 8, 2014 trading session at $587.99. Investors are therefore agreeing to trade Apple for a mere 11 times estimated earnings, after backing out net liquidity. For the sake of comparison, online retailer Amazon (NASDAQ:AMZN) now carries a price-to-earnings ratio that approaches 500.

The decision to buy and hold Apple stock is still a no brainer. The Apple iPad sales slowdown fear mongering has been exposed as pure malarkey.

Source: Apple iPad Sales Slow Down: Nothing To See Here, Folks