On October 31, 2012, Apple (NASDAQ:AAPL) released an annual report for its 2012 fiscal year ended September 29. At the time, the Apple iPad accounted for $32.4 billion of the company’s $156.5 billion in total net sales. These top-line figures were the result of Apple shipping 58.3 million iPad units during its 2012 fiscal year. In terms of unit sales, the iPad platform generated respective 334 percent and 80 percent year-over-year hyper-growth through the 2011 and 2012 fiscal years. Apple was then a Wall Street darling that traded for $600 per share and carried $560 billion worth of market capitalization. The prior month, on September 21, 2012, Apple had established its all-time high at $705.07.
Apple was to close out its 2013 fiscal year on September 28. For fiscal 2013, Apple shipped 71 million iPad units to generate $32 billion in sales. In terms of unit sales and revenue, however, iPad platform growth decelerated to respective 22 percent and 3 percent advances above 2012. For the sake of comparison, Apple iPad unit sales exploded for an 80 percent increase between fiscal 2011 and 2012. In all, Apple posted $170.9 billion in 2013 total net sales, which calculated out to 9 percent year-over-year revenue growth.
Taken together, the Apple iPhone and iTunes platforms banked 16 percent and 25 percent revenue growth rates through fiscal 2013, respectively. Consumers are therefore likely purchasing older and discounted Apple products instead of exiting out of this ecosystem altogether. Apple closed out the January 14 trading session at $546.39 per share, which was a sharp advance above the $385 52-week low established on April 19, 2013. Institutional investors, such as Icahn Enterprises, may have arrived at the conclusion that Apple stock is a bargain. The perceived slowdown in iPad sales is of little concern to long-term shareholders. Apple profit margins will remain robust.
Apple iPad specifications
Apple has aggressively promoted the ease of use and utility of its premium iPad Air with Retina display. The Retina displays graphics in 2048-by-1536 resolution at 264 pixels per inch. Apple’s 64-bit A7 chip is the engine that drives the latest iPad line for Web browsing, gaming, taking pictures, and recording video. Beyond the standard and pre-installed iTunes, Siri, and Safari programs, developers have created more than 375,000 applications that have further helped customize the iPad. The iPad Air weighs in at a mere 1 pound. Prices for the entire Apple iPad family range between $299 for the 16GB iPad mini with Wi-Fi and $929 for the fully loaded 128GB iPad Air offering Wi-Fi and cellular connectivity.
The iPad, of course, serves as a gateway into the walled-off Apple iOS ecosystem for telecommunications, entertainment, and computing. Again, the Apple iTunes platform achieved 25 percent growth through fiscal 2013 to close out the year having generated $16.1 billion in revenue. “Killer” applications have been typically made available at the Apple App Store before programmers make configurations for Google Play.
As such, the rival Android operating system has yet to replace iOS in terms of brand appeal and loyalty. Apple has historically generated the majority of profits to be made within the mobile space. Rivals Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Intel (NASDAQ:INTC), and Microsoft (NASDAQ:MSFT) effectively give away mobile product at cost in order to drive traffic toward higher margin businesses. For example, Intel’s Other Intel Architecture division racked up $1.8 billion in operating losses upon $3 billion in revenue through the first nine months of 2013. Intel designated Other Intel Architecture as an umbrella classification largely above mobile chip sales within the grander Windows ecosystem.
The tablet market
Nominal tablet market share data are not wholly indicative of bottom-line performance at Apple because of the diverging business models between the iOS, Android, and Windows operating systems. Again, Apple competitors have been more likely to slash retail mobile hardware prices and grab market share simply to drive traffic toward online content. At the moment, the Apple brand remains largely above engaging in simple price wars. Legendary investor Warren Buffett may suggest that a “moat” protects the Apple business.
On October 30, research firm International Data Corp. released a report that summarized worldwide tablet shipments for the third calendar quarter of 2013. IDC did acknowledge the sequential, quarter-to-quarter decline in Apple iPad sales volume. IDC then blamed the aforementioned decline in iPad sales upon management decisions to postpone the release of next-generation iPad Air and mini tablets until that holiday season. In prior years, Apple would introduce its iPad upgrades during the spring quarter. Still, Jetish Ubrani, an IDC research analyst, then described Apple iPad tablet pricing power as the reflection of “premium status.” Again, Apple iPad tablet prices range between $299 and $929. For the sake of comparison, the Amazon Kindle eReader begins at a mere $69.
Apple iPad pricing power
Be advised that IDC has also released estimates that tablet market unit sales volume would decelerate toward single-digit growth rates by the end of 2017. IDC projected that consumers will grow to favor larger tablet machines, such as the Microsoft Windows Surface. As such, IDC claimed that Windows machines would increase tablet market share from 3.4 percent to 10.2 percent between 2013 and 2017. Alternatively, Apple iOS systems would decline from 35 percent to a 30.6 percent share of the tablet market during the same time frame. The IDC estimates and commentary, of course, have largely ignored Apple’s time-honed ability to innovate and outmaneuver its competitors.
A recent iPad component teardown from research firm IHS iSuppli may serve as evidence that Apple has actually improved margins as this tablet product line matures. IHS researchers suggested that the Apple iPhone and iPad largely share similar component parts. Apple has leveraged its formidable buying power to squeeze price concessions out of suppliers. IHS estimated a 6 percent reduction in bill of materials between the past two generations of 16GB Wi-Fi + cellular iPad Air machines. According to IHS, Apple spends a mere $361 in total costs to assemble the 128GB Wi-Fi + cellular iPad that retails for $929.
The bottom line
Apple closed out its latest 2013 fiscal year third quarter with $146.8 billion in cash and investments above a mere $83.5 billion in total liabilities on the books. The balance sheet did include $10.1 billion in deferred revenue, which will ultimately fall off the liability side of the ledger and shift over to the income statement. The solid balance sheet was largely the result of Apple generating $53.7 billion in cash flow from operations and spending a net $24 billion to purchase securities throughout 2013.
Apple shareholders would still be left with $73.4 billion, or $80 in cash per share, if CFO Peter Oppenheimer were to literally write a check to pay off all Apple debt. Wall Street now values the Apple business for a mere $465 per share, or 11 times current estimated earnings. Going forward, Apple has made the pledge to return $100 billion back to shareholders through stock buybacks and dividends by the end of 2015.
Apple stock is a buy. What is this talk of Apple iPad sales slowdown?