There is a general expectation that Apple (AAPL) will be announcing the iPad Mini at its event tomorrow. We believe that iPad Minis are a great way for Apple to capture the market space between its iPhones (iPhone 5s retail at $200 with a plan) and iPads (retailing between $400 to $500), and we are writing this article to quickly and roughly assess what sort of impact iPad Minis could have on Apple's Q4 earnings.
iPad Minis are likely to compete less in the tablet space (where standard iPads reside) and low-end e-reader space, and more against midmarket e-readers, such as Amazon Kindle Fires, Google Nexus 7s, and standard Barnes & Noble Nooks. Obviously, being a "mini" iPad assumes that these devices will be smaller than the regular iPad (7"), but are likely to offer similar functionality. In any event, Apple would not want to cannibalize its own iPad sales. We do not believe that the iPad Mini will be seeking to compete with the low-end black-and-white e-readers that Amazon and Barnes & Noble offer (the Kindle Paperwhite and the Nook Simple Touch, respectively), mainly because Apple will seek to maintain its image as producing high-quality, premium devices.
Therefore, we expect the iPad Mini to compete directly with Amazon's Kindle Fire HD, Google's Nexus 7, and Barnes & Noble's standard Nook, all of which retail at $200. We believe that Apple will likely price the iPad Mini at its standard Apple premium and will retail at $250, providing a nice midpoint between its iPhones and iPads (we don't think Apple will sell iPad Minis at $300 -- a 50% increase over competitors' products may be too dramatic).
Other articles have estimated sales of three to five million units in Q4 (see the Barrons.com article "Surface Could Be the Next Zune"). We assume that Apple will be able to sell about four million units. Whether the iPad Mini will cannibalize iPad sales is another important question. We believe that at $250, the iPad Mini will not be competing against iPads, and that these market spaces do not greatly overlap. Nonetheless, we will take a conservative assumption that iPad Minis will cannibalize about one million iPad sales (averaging about $500 each, and which it is estimated that Apple makes about a 50% profit margin on each).
Assuming a very conservative 40% profit margin on its iPad Minis (as noted, iPad margins are about 50%), we can then roughly calculate that iPad Minis will thus generate approximately $400 million in profit, and cost Apple about $250 million in profit from cannibalized iPad sales. This means that Apple's Q4 profit could potentially increase by $150 million, providing a nice late bump to the stock price -- and potentially more, if one relaxes the several conservative assumptions. In particular, we do not believe that iPad Mini sales will cannibalize much from normal iPad sales. Moreover, going forward Apple is likely to capture more market space from Amazon, Google, and Barnes & Noble, given Apple's fervent followers -- thus providing even more revenues in the future.
Disclosure: I am long AAPL.