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Apple's iPad struggles are part of an industry-wide trend. Source: Apple
Last month, Apple reported a record-breaking first quarter. Powered by its star product -- the iPhone -- Apple reported revenue of $74.6 billion and net income of $18 billion. On most metrics -- gross margin, iPhone average selling prices, and cash flow from operations among others -- Apple exceeded analyst expectations, and the stock shot up nearly 8% in response. For a company with a then-market cap over $600 billion, an 8% gain is an amazing feat.
That said, it wasn't an entirely perfect report.
If there was a blemish on Apple's quarterly report card it had to be its iPad performance. On a year-over-year basis, Apple's iPad line saw unit sales slow 18% and revenue fall by even more -- 22% -- as price cuts and consumer choice led to lower average selling prices. In addition, iPad total units sold -- 21.4 million -- actually fell short of analyst estimates of 22 million.
So naturally, Apple bears tend to hone in on this particular product in a selective-data argument, but they do have a point. Apple's second-largest revenue driver is experiencing signs of wear. However, it appears they are not alone in this regard. If market-research firm IDC is of any indication, so is the greater tablet industry.
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For tablet heavyweights, 2014 is a year they'd rather forget
In what appears to be a "good enough" market, the top five vendors are struggling to grow as fast as the overall market as more purchasers gravitate toward inexpensive options rather than name brands. Of the top five vendors, Apple, Samsung, ASUS, Lenovo, and Amazon.com, only one -- Lenovo -- grew faster than the overall market at 4.4%. In fact, only Lenovo (43.5%) and Samsung (1.1%) grew its tablet shipments on a year-over-year basis.
In a more-discouraging sign for the overall tablet industry, it appears growth is slowing rather quickly. After the tablet industry grew 50.6% year over year from 2012-2013, growth slowed to 4.4% this year. Should these trends continue, look for continued headwinds to Apple's iPad line.
Or, is this actually a good thing?
However, lost among the "iPad is dying" crowd is a rather inconvenient fact -- it appears the higher-margin iPhone is one of the reasons why iPad sales are slowing. Even IDC credits the iPhone for falling iPad sales numbers, citing that "cannibalization at the bottom from the iPhone and at the top from the Mac appear to be serious issues for the iPad." Although cannibalization is a serious issue for the iPad line, that doesn't mean it's a serious issue for Apple as an investment.
And in those particular products, Apple is performing magnificently. For perspective, Apple increased its iPhone revenue 57% year over year and its Mac line increased 9% during that period -- both numbers breaking quarterly records for Cupertino. As far as shareholders are concerned, you'd rather see higher-margin iPhone sales than iPad sales, all things bein equal, because a larger percentage of iPhone sales will tumble down the income statement to enrich shareholders.
One reason iPad sales shouldn't worry investors: China
There's a flip side to this, however. In the event consumers are abandoning purchasing the iPad because the new, larger iPhone is good enough, then an argument can be made Apple's missing out on incremental revenue and profit because of the iPhone. In the end, this is difficult to quantify because personal choice is highly subjective and hard to model.
But the larger point bears make is Apple is starting to become a one-product company and growth is bound to slow. And to be fair, last quarter was a textbook case in point -- Apple's iPhone provided 68.6% of its total revenue last quarter, up from 56.4% in the year-ago quarter.
However, perhaps the most shocking number in Apple's report was a 70% year-over-year growth in China. Subsequent reports have noted Apple products are considered the most desirable luxury brand in the Middle Kingdom. Look for the iPhone to continue to sell well there -- and stop worrying about the iPad's struggles.
The article Should Apple, Inc. Investors Worry About Its Achilles Heel? originally appeared on Fool.com.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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