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Summary

  • Apple bears have seized upon decelerating iPad sales growth rates, while claiming that the company has lost its mojo.
  • A successful iPhone 6 launch will counteract slight weakness in the iPad platform and improve the bottom line at Apple.
  • Apple stock is still undervalued and is deserving of a buy rating.

On July 23, 2014, Apple (NASDAQ: AAPL) filed financial results for its fiscal 2014 third quarter ended June 28, 2014. In all, Apple closed out its recent Q3 2014 having racked up $7.7 billion in net income upon $37.4 billion in revenue. These financials were a solid improvement above the prior year, when Apple posted Q3 2013 totals of $6.9 billion in net income and $35.3 billion in net sales. In the Q3 2013 press release, Apple highlighted iPhone, Mac, and Services as the key engines driving 20% earnings per share (EPS) growth.

Like clockwork, Apple bears promptly went on the attack to dismiss the iPad as a "weak spot." In his July 25 Tech Times piece, Quinten Plummer went so far as to suggest that Apple had already snagged the "low-hanging fruit" out of the now saturated tablet market. The bearish case, however, may have conveniently ignored the fact that the iPhone 6 is set for launch, apparently at a September 9 special event. Long-term Apple shareholders, of course, may take solace in the idea that palpable excitement surrounding the iPhone 6 will make up for any perceived sales weakness within the iPad line.

Deconstructing Apple iPad Sales

2010

2011

2012

2013

Q3 2013

Q3 2014

Apple Revenue

$65.2B

$108.2B

$156.5B

$170.9B

$35.3B

$37.4B

iPad Revenue

$5.0B

$19.2B

$30.9B

$32.0B

$6.4B

$5.9B

iPad Unit Sales

7.5M

32.9M

58.3M

71.0M

14.6M

13.3M

iPad Revenue Per Unit Sold

$666.67

$583.59

$530.02

$450.70

$438.36

$443.61

iPad Percentage of Sales

7.7%

17.7%

19.7%

18.7%

18.1%

15.8%

Source: Apple Investor Relations - SEC Filings

Apple iPad sales growth has rapidly deteriorated in recent years. Year-over-year iPad revenue did improve by 60.9%, as recently as fiscal 2012. In 2012, the iPad generated $30.9 billion, or 19.7%, of Apple's $156.5 billion in total net sales. That year, Apple shipped 58.3 million tablets at an average price of $530.02 per unit. Interestingly, Apple's historic market top largely coincided with the iPad growth apex. Apple stock established a split-adjusted, all-time high at $100.72 per share on September 21, 2012.

By Q3 2014, however, iPad sales performance metrics were all in decline. The iPad platform contracted by a respective 8% and 9% in terms of year-over-year unit and net sales through Q3 2014. Apple iPad revenue per unit sold also declined significantly from $666.67 to $443.61 between 2010 and 2014. At this price point, the average tablet consumer may be in the market for a 16GB iPad Air with Wi-Fi connectivity, which now retails for $499.00. For the sake of comparison, the 32GB iPad Air featuring Wi-Fi and cellular connectivity prices out at $729.00.

The bearish case against Apple might suggest that Google (NASDAQ: GOOG) Android has expanded its share of the tablet market at the expense of the iPad. A July 24th IDC report estimated that the tablet market grew to 49.3 million shipments through the second calendar quarter of 2014, for an 11% year-over-year increase. Again, Apple iPad shipments slogged through a 9.3% decline over the past year. In any event, Apple closed out calendar Q2 2014 as the leading tablet vendor in terms of share, with 26.9% of the tablet market. Interestingly, the bulk of tablet market growth came out of the "Others" category. Other tablet shipments, which would include Amazon (NASDAQ:AMZN), accelerated by 33.4% over the past year. Amazon Kindle tablets run upon a forked, or highly specialized, version of Android.

Be advised that iOS versus Android market share statistics are somewhat misleading. Both Google and Amazon are notable for their bait-and-switch tactics, where product is often given away at cost in order to drive traffic towards higher-margin online sales. Apple still generates the majority of profits in mobile, despite the slight declines in market share. Last November, research firm IHS estimated $274 in bill of materials and manufacturing costs for the 16GB iPad Air with Wi-Fi connectivity that retails for $499. Going forward, Tim Cook, operations man, will likely leverage Apple's immense buying power to further drive down costs for component parts shared between the iPhone 6 and eventual iPad upgrade.

Apple iPhone 6 Specifications

The term "phablet" is a play upon words that connotes the integration of traditional smartphone and tablet features within one machine. Phablets, of course, are therefore notable for larger screens relative to standard handsets. Online technology magazines Pocket Lint, Phone Arena, and Tech Radar have all endorsed the Samsung Galaxy Note 3 as the best phablet now on the market. The Samsung Galaxy Note 3 screen measures out at 5.7 inches and displays graphics at 1080 X 1920-pixel resolution. IDC, in its aforementioned July 24th report, did cite extended inventory turnover alongside the rise of the phablet as the primary factors behind downward revisions in tablet sales projections.

Enter the Apple iPhone 6. The technology commentariat has largely agreed that the iPhone 6 will branch off into two separate 4.7 and 5.5-inch screen handsets. For the sake of comparison, the iPad Mini screen measures out at 7.9 inches, diagonally. As such, the 5.5-inch screen iPhone 6 would land right upon the cusp of phablet territory in terms of size specifications. The A8 chipset, which would power the new iPhone 6 and iPad Air 2 updates, may achieve 2.0 GHz clock speeds. Mac Rumors has already speculated that the 4.7-inch iPhone 6 will launch at a September event, and that the 5.5-inch handset may likely hit shelves later in the year towards the Holiday Season.

Apple may close out its current 2014 fiscal year having shipped 170 million iPhone handsets - for $100 billion in revenue. On a per unit basis, this performance would break down further to roughly $588.25. In recent conference calls, Apple executives opined that consumers have been purchasing older iPhone handsets, which consequently translated into the lower per unit revenue. Going forward, iPhone 6 sales will directly impact the fiscal year 2015 set to begin by October 2014. For 2015, Apple may ship 185 million iPhone handsets at $650 per unit - for $120 billion in revenue. This sales growth, of course, may arrive largely due in part to excitement emanating from the iPhone 6.

The projected $20 billion in additional marginal sales would also counteract weakness out of the iPad platform. Apple iPad annual sales may likely average out at $30 billion between 2012 and 2014. At worst, Apple will close $25 billion in iPad sales through 2015. These estimates may project out further to high single-digit profit growth for Apple in 2015.

The Bottom Line

Apple stock closed out the August 14, 2014 trading session at $97.50, which was a mere 3.2% off the aforementioned $100.72 per share all-time high established on September 21, 2012. At current levels, Wall Street traders are applying a $582.4 billion market capitalization price tag onto the Apple business model. Be advised further that Apple did report $164.5 billion in cash and investments on the balance sheet as of June 28, 2014. On paper, one share of $97.50 Apple stock includes $27.50 in cash and investments.

Apple's recent Q3 2014 balance sheet did include $101.6 billion in liabilities. Of this amount, Apple listed out $11.5 billion in deferred revenue. The deferred revenue will ultimately be recognized upon the income statement and leave Apple with $90.1 billion in total liabilities. At the very least, Apple may be left with $40 billion in liquidity after retiring all debt and paying 25% tax rates upon the repatriation of overseas cash. This liquidity position calculates out to $7 on a per share basis. After backing out this liquidity, Apple would be trading for a relatively cheap 15 times current earnings if the company were to close out fiscal 2014 having generated $6 in earnings per share. For the sake of comparison, online retailer Amazon (NASDAQ: AMZN) now carries a price-to-earnings ratio above 800.

On April 23, 2014, Apple announced that it would be expanding its capital return program to $130 billion. As part of this capital return program, Apple pledged to buy back $90 billion in stock by the end of calendar 2015. Over the next year, Apple may repurchase 750 million shares, if the company were to buy back stock at an average price of $120. Apple would then gradually take its shares of outstanding common stock from 6 billion down to 5.3 billion. Apple shareholders therefore remain poised to benefit from a 13% advance in earnings per share through buybacks alone. Apple stock deserves a buy rating.

Source: Apple iPhone 6 Will Pick Up iPad Sales Slack