iPad King of the Hill but Average Prices Will Decline

| About: Apple Inc. (AAPL)

With staggering demand for the iPad, Apple (NASDAQ:AAPL) is leaving no stone unturned to ensure smooth functioning of its supply chain. It is absorbing overhead costs caused by the Japan earthquake and originally lowered its prices for the first iPad when the iPad 2 was announced. We believe these moves will help Apple fend off competition from Research in Motion’s (NASDAQ:RIMM) PlayBook, and Google’s (NASDAQ:GOOG) Android based tablets like Samsung’s Galaxy, Motorola Mobility’s (NYSE:MMI) Xoom, and Dell (NASDAQ:DELL) Streak.

While these steps could impact iPad’s profit margin over time, robust demand for the iPad and Apple’s ability to satisfactorily meet the growing demand could comfortably compensate for the margin decline.

We estimate iPad’s gross profit margin will gradually decrease to 23% by the end of our forecast period from the current 29%. Trefis members, however, predict a smaller decline reaching just under 28%, implying slight upside to our price estimate. The marginal impact on Apple’s stock is because iPad forms only around 7% of the stock value by our analysis currently.

We currently have a Trefis price estimate of $430 for Apple’s stock, about 30% above the current market price.

Chart created using Trefis' app

Higher Sales Can Offset Margin Decline

We estimate Apple’s average iPad pricing to be $585 per device in 2011 as Apple slashes prices for older versions of the iPad. Apple cut pricing of the lowest version of the iPad from $499 to $399 after it launched iPad 2 in March 2011. This means that Apple is willing to cut its prices in order to boost sales and maintain its market share against tablets like Motorola’s Xoom and RIM’s Playbook. This strategy is paying off as the demand for Apple’s iPad is still staggering and the company expects to double its sales in the next quarter. (See iPad Continues to Dominate the Tablet Market) We earlier discussed how Apple’s step to absorb additional costs incurred from supply constraints caused by the Japan earthquake will ensure smoother iPad shipments.

According to IDC, of the 18 million tablets shipped in 2010, iPad owned about 83% of the market. [1] With a wide variety of apps to choose from and the best-in-the-lot user interface, we expect iPad sales will cross 54 million by the end of our forecast period.

However, recurring hikes in manufacturing, distribution and labor costs could affect iPad’s profitability. In a recent note, we pointed out how shortage of both labor and material at Foxconn Electronics (one of Apple’s key suppliers) plant in China, could slow Apple’s growth. (See Supply Chain Issues Resurface for Apple) Given the heavy backlog for the iPad, supply chain-related concerns as the above could further delay shipments in the coming quarters, causing a drag on iPad’s sales and profits.

Editorial Note: Our original post suggested iPad ASP are currently declining. We clarified that we expect ASP to decline over time.


  1. IDC: iPad had 83% tablet share in 2010, to keep it in 2011

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