Why Apple's iPad Could Make a Big Comeback Soon

By Markets Fool.com

A little over a year ago, I argued that Apple's iPad was "in big trouble". It was a controversial subject at the time, as Apple had sold 26 million iPads -- an all-time record -- in its most recently reported quarter.

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But since then, Apple has reported five consecutive quarters of iPad sales declines. In fact, the sales slide has been accelerating recently. Last quarter, iPad unit sales and revenue declined 23% and 29%, respectively, on a year-over-year basis.

iPad sales have fallen for five consecutive quarters. Photo: Apple

Nevertheless, Apple CEO Tim Cook has emphasized his confidence that iPad sales can recover and eventually return to long-term growth. On the company's earnings call last month, he stated:

... I believe the iPad is an extremely good business over the long term. When precisely it begins to grow again I wouldn't want to predict, but I strongly believe that it will.

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As the CEO of one of the most highly followed companies in the world, Cook has to be careful about making bold predictions. Fortunately, I'm not in the same position -- and so I can predict that the iPad will return to sales growth by the December quarter. Here's why.

Why the iPad has been in trouble
First, let's take a look back at what's been wrong with iPad sales lately. In my earlier article, I zeroed in on the disappointing screen quality of the iPad Mini Retina released in late 2013, which likely contributed to the weak demand for that model.

Unfortunately, Apple did not correct that issue with the second generation iPad Mini Retina. It's almost identical to the previous model, but includes the Touch ID fingerprint scanner and has a gold color option. Not surprisingly, it has been even less popular than the first iPad Mini Retina.

The iPad Mini Retina has been disappointing, particularly in terms of screen quality. Photo: Apple

Beyond that specific issue, Apple has been tripped up by the long upgrade cycle for the iPad, especially compared to the iPhone. The iPad 2 -- released more than four years ago -- is still the most popular iPad, with a usage share of about 22.6%, according to Fiksu. This has forced Apple to rely more on bringing new users into the fold.

Other potential causes of the iPad sales slowdown include greater competition from other tablet vendors and cannibalization from "phablets" like the iPhone 6 Plus and ultra-portable laptops like the new MacBook.

What's changed
There are three main developments that suggest the iPad could return to sales growth soon. First, Apple announced a partnership with IBM last summer to create more than 100 industry-specific iOS apps -- primarily for the iPad. IBM will also help sell iPhones and iPads through its own sales force. This partnership could help the iPad gain traction in corporate and government settings.

The first apps from this collaboration were released in December, and new ones will arrive throughout 2015. Businesses and governments both tend to have long sales cycles, so the benefits of this initiative are just starting to accrue. But iPad sales to corporate and government users will likely gain steam over the next year or two as more organizations evaluate and test the new hardware/software package.

Second -- and relatedly -- Apple is widely expected to release a larger 12"-13" iPad this fall. This isn't likely to sell in the same volume as Apple's traditional 9.7" iPad form factor, but it could be very helpful for business users and should be more profitable for Apple. It's possible that some businesses are holding out on iPad purchases to get this larger model.

Third, the replacement cycle could soon become a positive, rather than a negative for iPad sales. Apple has sold just under 60 million iPads in the past year, and based on Tim Cook's comments, about half of those sales have gone to new users. That means about 30 million people have upgraded their iPads in the past year.

Even if the iPad replacement cycle is four to five years (roughly in line with the PC replacement cycle), 30 million is significantly below the stable long-term replacement rate. With the popular iPad 2 having just passed its fourth birthday, more and more iPads will reach prime replacement age over the next few years. This should stimulate higher iPad replacement sales.

If Apple's next-generation iPads offer significant improvements, that will also help in a big way. As noted above, the iPad Mini Retina version released last fall was almost identical to its predecessor. The iPad Air 2 did boast improved specs, but it was a much smaller change than the previous year's leap from the iPad 4 to the iPad Air. The lack of innovative upgrades has probably contributed to weak year-to-date iPad sales.

Get ready for growth
Considering all of these factors together, iPad sales growth is likely to return soon -- probably this fall. Increasing momentum in the enterprise business, a growing number of older iPads ripe for replacement, and the release of next-generation iPads -- possibly including a larger 12"-13" model -- should all contribute to the return to growth.

Looking ahead to 2016, rising enterprise interest, stronger consumer replacement demand, and relatively easy comparisons should enable further sales increases. Yes, the iPad has hit a significant stumbling block -- but it's not doomed.

The article Why Apple's iPad Could Make a Big Comeback Soon originally appeared on Fool.com.

Adam Levine-Weinberg is long January 2016 $80 calls on Apple, short January 2016 $120 calls on Apple, and short January 2016 $140 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and International Business Machines. 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.