Analyst: Here’s How the iPad Mini Saved Apple

Toni Sacconaghi, an Apple (NASDAQ:AAPL) analyst with Bernstein Research, was recently musing on Apple’s market share standings, specifically contrasting smartphones and tablets to those using Google’s (NASDAQ:GOOG) Android operating system. He wrote that Android has gone from zero market share to “nearly 70 percent” of the smartphone world in five years, while Apple’s iOS operating system has gone from 9 percent to 19 percent in the same time.

In his note, he said: ”Ultimately, we see several differences between Apple’s approach to the smartphone and tablet markets. The iPhone left a price umbrella for other smartphone vendors to offer cheaper unsubsidized smartphones, even at the premium end. The subsidy model allowed Apple to earn gross margins well above 50 percent on the iPhone, compared to about 30 percent on non-subsidized hardware products (Mac, iPad, iPod).”

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Sacconaghi continued, “Other smartphone vendors using free Android software were able to price below Apple for unsubsidized phones and still earn gross margins above 30 percent, especially on high-end smartphones. Apple did not leave a similar price umbrella under the iPad. In fact, the iPad was cheaper than tablets with inferior features when it was first released. Now there are competitive Android tablet offerings at lower price points, especially because competitors such as Amazon (NASDAQ:AMZN) and Google are aggressively pricing hardware as their businesses makes gross profit on content and search, respectively…”

As a result, Sacconaghi said that Apple should explore lowering its prices to maintain its market share, since the overall price climate for the tablet market has come down.

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“[Bernstein] believes that these factors suggest that Apple may be able to sustain higher unit share in the tablet market [than] in smartphones, particularly given Apple’s apparent willingness to offer lower priced devices such as the Mini,” he wrote. “We expect a roughly 60/40 split in favor of the Mini in 2014. If all iPad sales were Mini in [the next calendar year], we see downside to our revenue and EPS estimates of 2 percent and 3 percent, respectively. Each 10 [percentage point] shift in mix towards the Mini impacts revenue and EPS by [about 60 base percentage points].”

Sacconaghi remains bullish on Apple, with an Outperform ranking on the company and a $725 price target.

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