Seeking Alpha
Research analyst, tech, long-term horizon, value
Profile| Send Message|
( followers)  

Summary

  • Bloomberg has reported that Apple is readying production of a 12.9-inch iPad.
  • Apple's iPad sales are currently downtrending, but an innovative, large-screen iPad could reverse this.
  • The bigger iPad will likely clobber the Surface Pro 3.
  • Improved iPad sales will result in growth from all major revenue streams at Apple.

Introduction

Yesterday, Bloomberg reported that Apple (NASDAQ:AAPL) is supposedly readying the production of the biggest iPad yet at 12.9 inches as early as the first quarter of 2015, as said by an unnamed source identified as being involved. This news supports MacRumor's outstanding rumors of the 12.9-inch "iPad Pro," as well as those that have surfaced as early as mid-2013. Earlier in June, I wrote about why Apple should copy the Surface Pro 3 with its own larger tablet solution and discussed the potentials of the iPad Pro. This time, I will focus on why the iPad Pro is a worthy solution for future growth of the company and explain why it has the potential of reversing falling iPad sales that Tim Cook calls a "speed bump."

The New Big iPad

While Bloomberg didn't unveil any new information on the big iPad, rumors are all pointing toward a 12.9-inch screen. With bigger iPhones underway in addition to the small-screen offering of the iPad Mini, the launch of the bigger brother seems very likely. The current iPad Air and iPad Mini use screen sizes of 9.7-inches and 7.9-inches, respectively. At 12.9-inches, the screen will actually be larger than the current 11-inch MacBook Air and will be nearing the size of the 13-inch MacBook Air and MacBook Pro. The added diversity to the growing tablet market is a smart move, and the bigger screen with improved functionality will be very inviting to more users, especially from the business side.

(click to enlarge)

Source: MacRumors

Apple's falling iPad Sales

Apple's iPad revenue has been on the decline for the last two quarters and during this period we have witnessed the Mac generate more revenue than the iPad for the first time due to its growth. This is contrary to the falling/flattening PC market and growing tablet sales that can be seen in the IDC graph below. This isn't a problematic situation because Apple has been making very good progress on the Mac, as I have written before. The problem is that the iPad is losing its appealing edge and is suffering a decline as a result even though the industry is growing. While this has disappointed many, Tim Cook isn't worried as he calls this a speed bump.

Source: IDC

Why iPad Sales are on the decline

The iPad is an amazing tablet and is arguably the best with the greatest ecosystem, but the next best thing isn't very far off and is a lot cheaper, too. With many competing OEMs developing dozens of tablet solutions on the Android platform, we can see a tablet version repeat of OEMs producing affordable Windows PCs to compete against Apple's premium counterparts. The result of countless device makers attacking with the Android platform has resulted in very good alternatives at very attractive prices.

Xiaomi's Mi Pad is a perfect example as its specs rival the iPad Mini with retina display (yes, with retina display) while costing significantly less. The Mi Pad costs an impressive $240 opposed to the iPad Mini's $400 tag and this is only one example of the many offered by Android. The Android OS is very powerful and for many people at this point, the decision between the two mobile operating systems simply comes down to the desired device or interface preference. That being said, many budget-minded users have very easily made the switch to Android in an effort to save up to hundreds of dollars on a similar tablet.

Source: AndroidVIPClub

The iPad Pro will fill an anticipated gap for many users

Tablets aren't necessarily on the rise because they're more functional than a computer or laptop, because they're not. They are simply light, portable, and quick-access devices that allow you to do more than a phone but less than a computer, which is an acceptable compromise for most of the growing chunk of tablet users. However, one problem that exists is that a miniscule issue such as screen size or a good keyboard often becomes the difference between someone owning a 1lb iPad Air versus a chunky 3-5lb laptop. This productive tablet market is where Microsoft's Surface Pro tablet has been positioned, and it will also be right up the iPad Pro's alley.

One thing to note is that I don't think that the iPad Pro will take the same route as the Surface Pro, that is the incorporation of a full-fledged computer OS into a tablet. Instead, Apple will be able to utilize its powerful iOS operating system and continue delivering functionality through its giant App Store along with some potential hardware additions such as a keyboard covers and stylus. While there are no guarantees of such additions, it can be suggested due to some available patents that have been submitted for them. (See: Keyboard cover, Stylus patents)

The iPad Pro will compete with and clobber the Surface Pro 3

With no figures announced, Microsoft (NASDAQ:MSFT) stated that it is very pleased with the sales of the Surface Pro 3 and it expects to see it expand as it enters more regions. I spent a lot of time with the Surface Pro and purchased a Surface Pro 3 in hopes that it could replace my laptop, but the operating system was just too clunky and glitchy for my satisfaction. I loved the design of the Surface Pro 3 and genuinely wanted it to be my sole device for everything, but Windows 8 and the minor glitches ruined it for me.
(click to enlarge)

Source: Microsoft

That being said, I think there is a huge, almost inevitable chance in seeing the iPad Pro clobber the Surface Pro 3 or 4, assuming it's still Windows 8. Even though the iPad will lose in functionality with iOS opposed to a full-fledged computer operating system, it will serve as more than enough for many users. The less performance-demanding iOS software will allow it to use the usual fan-free design, allowing it to be thinner and lighter than the Surface Pro 3. The Surface Pro 3 is a thin and light device, weighing in at 28 ounces, but the iPad Air weighs slightly less than 17 ounces. It is likely that Apple will produce the iPad Pro with a weight somewhere in the middle of those two making for a very attractive tablet.

In addition to a lighter, thinner tablet, sales of the iPad also will be driven by Apple's attractive ecosystem and halo effect. While this does mean that the iPad Pro will easily win this battle, it doesn't mean that the Surface will become obsolete. The Surface provides users with a full operating system in the form of a tablet, but it is clear that this demand isn't coming from the majority because tablet sales are exceeding PC sales.

The Reverse of the iPad Sales trend

With the chart above, it is clear that tablets are on the rise and growth is expected to continue into the coming years. Apple's tablet offering doesn't provide a good enough edge over the competition to be worth the premium of costing up to hundreds of dollars more. Tim Cook says this is temporary and I think he's right. The iPad Pro should provide the market with a very competitive, potentially unmatched edge that will reverse the falling sales trend. In addition, Apple and IBM's (NYSE:IBM) partnership will enable more business opportunities for its devices; Tim Cook even stated during the conference call that these solutions would be a catalyst for iPad sales.

Conclusion

Apple has a prominent grasp on the industry and its title as the world's most valuable company doesn't argue. The company's innovation has always proven to be top-notch and I believe that we should expect the same with the iPad Pro. As a great product it will become something that users will want and may even boost the sales of competing solutions that survive, such as the Surface Pro tablet, even if it ends up becoming the underdog.

The recent growth of iPhone sales has strongly contributed to record Apple revenues, and the growth of the Mac has alleviated falling iPad revenues. Mac sales are expected to continue their growth, and the iPhone 6 is expected by many to produce record figures. If the iPad manages to grow its revenue, we will witness growth from all major revenue streams of Apple, contributing to more record sales and overall growth.

Source: A Bigger iPad To Reverse The Declining Sales Trend