Apple is coming off its two strongest back-to-back quarters in the history of the company. The last two earnings combined were almost as much as total earnings in FY11, and investors should expect that the strongest quarter to be reported in FY12 has yet to come. Why? Four significant events will occur by year-end to drive Apple performance to higher levels.
First, the iPad Mini is expected to be launched by the holiday season. Many are speculating that it will be a 7” screen and be priced somewhere between $199 and $299, the mid-point being most logical. Last holiday season, the only close competitor to the iPad was Amazon’s Kindle Fire, attractive to many due to its lower price point ($199 versus $399 for the least-expensive iPad) and smaller size. Amazon reached close to 17% market share with the Kindle Fire and, compared to other Android tablets, the Amazon Kindle Fire was by far the most popular with over 54% market share. Samsung Galaxy family of products only earned 15% market share.
An iPad Mini, priced around $249, would substantially soften Amazon Kindle Fire’s price advantage and would negate any size advantage. Amazon Kindle Fire had already lost substantial market share to Apple after the holiday season. The real competition at this size is going to be the positively-reviewed Google Nexus 7 ( Walter Mossberg’s review and David Pogue’s review). Priced at $199, it could also reduce what’s left of the Amazon Kindle Fire and the Barnes & Noble Nook first, even before an iPad Mini release. The hardware specs on the Google Nexus are not comparable to the $499 iPad, as it doesn’t offer cellular connectivity, a rear camera, as much memory or the same screen resolution. Given the price differential, that is to be expected and the iPad Mini will have to give on some specs as well.
But what gives Apple an edge up on the Google Nexus 7 with an iPad Mini is content. Google has a limited number of apps designed for the 7” tablet, while Apple has over 200,000 apps designed for the iPad. Apple also still leads in media content over Google and Apple has an entire ecosystem around AirPlay and iCloud that enable all other Apple products to work with the new iPad Mini.
As a final note, at the end of the day, Google and Apple are competitors and there are loyalists in both camps. Many of us may debate the virtues of one over the other and miss the greater point: between Apple and Google, they are taking out all the other competition. Look at the smartphone category, previous dominated by Nokia and Research in Motion, it is now dominated by Apple iOS and Google Android. The introduction of the Google Nexus 7 does not diminish from the likely success of the iPad Mini and all signs point to a very successful launch of the iPad Mini.
Second, iPad launch in China will be an enormous catalyst to Apple sales. After years of a trademark dispute over the “iPad” name, Apple has finally settled and will start sales of both the iPad 2 and the New iPad in China today, July 20. China is Apple’s fastest growing market. In this past quarter, sales in China were $7.9B, up three-fold over the period a year prior. To put it in context, the $7.9B revenues in China in the last quarter would represent over half of the revenue Apple generated in all of FY11. It was the biggest quarter ever for Apple in China, and the iPad had not been released yet. Demand for Apple products is exuberant in China. Lines formed overnight outside of stores before the iPhone 4S. The largest e-commerce retailers in China have been taking pre-orders for the not-yet-released iPhone 5. China is the second biggest market for Apple products outside of the US, and is the fastest growing. Couple that with iPad’s success as the fastest-adopted consumer electronic in history and the sales of the iPad in China will be significant.
Third, the iPad has the potential to be much larger than the iPhone. The iPad revenues reached $28.5B in two years; it took 3.5 years for the iPhone to achieve the same metric. iPad can be freely purchased and used with out the distortions created by carrier associations, pricings, promotions and specifications. iPad adoption in the enterprise has been unprecedented with over 95% of the Fortune 500 and 90% of the Global 500 adopting. And, the iPad has virtually no competition, yet. The category is exploding with Gartner reporting 60M tablets sold in 2011 and predicting that 665M will be sold in 2016. NPD predicts that Apple will have 72% market share in tablets in 2012. NetShare reports that Apple commands 65% market share for Tablet + Mobile markets. The Google Nexus 7 will most likely challenge the 7” tablet competitors, but is unlikely to take away from the 10” category. To read a detailed analysis of iPad potential, see The iPad Will Mirror iPod’s Market Dominance. Here’s Why and Why it Matters.
Fourth, the iPhone 5 is expected to be launched in September or October and Apple has unwittingly created such buzz around product releases that consumers hold off purchases until the new product comes out. The pattern has developed and intensified over time. For the past three product upgrades, iPhone unit sales have jumped 41%, 66% and 117% as consumers wait to see what is coming out to make a purchase decision. On top of this typical pattern, it is estimated that 30M AT&T and Verizon customers’ contracts will expire in the fourth quarter qualifying them for subsidies on a new phone, ie iPhone 5, purchase. To date, the largest quarter for iPhones sales was the December 2011 quarter, encompassing the iPhone 4S upgrade, and Apple sold 37M iPhones in that quarter. This holiday quarter could blow that away.
All of these play into the Apple’s ecosystem. When taken together, Apple leads in market share, by a staggering margin, in operating systems of Tablet + Mobile devices. Net Market Share reports, as of the week of July 1, 2012, Apple iOS has 65% market share. Android is second with 20%, Java has 10% and everyone else less than 2%.
Today, there is much banter over Apple’s earnings report on Tuesday. What investors should consider is where Apple’s earnings will be at the end of the year, when pent-up demand over a new iPhone release plays out and the potential introduction of a smaller iPad Mini. Keep eyes on China and its reaction to the iPad release as a barometer for China’s demand for the iPhone 5. See What You Need to Know Before Reacting to Apple’s Earnings. If shares dip on Tuesday following earnings, take that as an opportunity to build a position in Apple.
