The new iPad will be a tremendous success; it will sell uncountable millions of units for sure. And yet, in a way, the new iPad has a problem. It's certainly a problem that any of Apple's (AAPL) competitors would kill to have, but still, it underscores the only kink in Apple's armor.
Let me explain. During Q4 2011, Apple sold 37 million iPhones and 15.4 million iPads, each iPhone went for an average of $659.9, whereas each iPad brought in $594.4, so each iPhone actually brings in more revenue than each iPad, in spite of selling more than double the units. Together, this means that the iPhone represented 52.7% of Apple's revenues, while the iPad answered for 19.8%, still a very respectable slice.
(Click to enlarge)
But the real problem comes later. Not only does the iPhone sell, on average, for 11% more, but it also has a significant cost advantage - that is, the iPhone costs a whole lot less to make. iSuppli did a teardown of the iPhone 4S and put the cost at $196 for the basic model. The new iPad, though, now costs as much as $316, and that's for the 16Gb Wi-Fi only version. So this underscores the "problem" that the new iPad has within Apple. It sells less, for less, costs more to make, and as a result has margins that are a shadow of the iPhone's. A back of the envelope calculation using the teardown costs and the ASPs (Average Selling Prices) we calculated, puts the gross margin for the iPhone at 70%, versus 46.7% for the iPad. Considering that there are costs not included in the teardown, I came up with the two scenarios below, for a gross margin of 65% on the iPhone, versus 40% and 45% on the iPad:
(Click to enlarge)
What we see here is that while the iPhone represents more than 3/4ths of Apple's gross margins, the iPad comes up at 17.7%-19.9%, so the iPhone is 3.9-4.3 times more important than the iPad to Apple's bottom line. In short, at this point Apple is still mostly about the iPhone. And even if the iPad's sales explode significantly, it will still be hard for that to change, because not only does the iPhone presently sell a lot more, but it also has much higher margins per unit.
While this is a problem that any competitor would kill to have, and it's a certainty that the new iPad will be a success, probably surpassing any of the two previous iPads, the truth is that Apple is, and remains, mostly about the iPhone. At the limit, Apple could afford to blunder with the iPad - which it didn't - but it cannot afford to blunder with the iPhone.
In a way, that's the reason why the iPhone 5 is so important, and Apple's future performance rests mostly with its success, while this new iPad, successful as it will be, is mostly a sideshow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.