Apple just wrapped up its best year ever. Revenue leaped 28% higher, reaching a staggering $233.7 billion, and driving 43% year-over-year growth in earnings per share. This rapid growth came from a single source: the iPhone.
While iPhone revenue surged more than 50% in the 2015 fiscal year, iPad revenue dropped 23% on a 19% decline in unit sales.This performance has pundits even more demoralized about the iPad's long-term prospects than they were after the prior year's 4% decline in iPad shipments and 5% iPad revenue decline.
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Apple's iPad sales plummeted in its recently concluded fiscal year. Photo: Apple.
However, Apple could be reaching an inflection point for iPad sales. While Apple's decision not to release a new 9.7-inch iPad this fall could weigh on holiday-season sales, a confluence of several factors could drive a resurgence in iPad sales beginning in 2016.
The iPad's three problemsThere are three main reasons iPad sales stagnated in 2014 and then fell off a cliff in 2015. First, tablet replacement cycles have been a lot longer than most analysts initially expected. Many people hold on to tablets for four years or longer, which is virtually unheard of for smartphones.
The result is that most people who bought iPads during the product's peak sales period in 2012-2013 -- and even a fair number who bought iPads in 2011 -- haven't felt the need to upgrade yet. Indeed, more than four and a half years after it hit the market, the iPad 2 is still the most popular iPad in terms of usage, according to Fiksu, representing about 20% of iPad usage.
Second, Apple hasn't delivered many new must-have features on the iPads it has introduced in recent years. The radically thinner and lighter iPad Air and the iPad Mini with Retina -- both introduced two years ago -- were arguably the last big steps forward in iPad design.
Third, Apple has introduced thinner and lighter Macs with longer battery life (i.e., more iPad-like) in the past few years. It also rolled out the iPhone 6 Plus, with its big 5.5-inch display, in late 2014. Thus, customers have better alternatives to buying an iPad than they did in 2012 or 2013.
Growth drivers remainI believe that the first two issues have been bigger sales impediments for the iPad than the availability of more portable Macs or bigger iPhones. That's good news for Apple, because it means there's a clear path to restarting iPad sales growth.
The upgrade cycle issue will resolve itself naturally over time. People who bought iPads during the peak sales years of 2012 and 2013 are finally starting to enter the main upgrade window. Given that usage remains high, it seems likely that these customers will buy new iPads when their old ones wear out.
Apple CEO Tim Cook implied earlier this year that about 30 million users had upgraded their iPads in the past year. However, Apple sold about 140 million iPads between 2012 and 2013. Even if not everyone gets a new iPad, it seems likely that upgrade sales will rise to at least 40 million-50 million annually in the next year or two.
The iPad Pro and a ton of new business-focused apps could get iPad sales growing again. Photo: Apple.
As for the lack of innovation, Apple took one step forward with the iPad Pro (which will go on sale later this month), along with its keyboard and stylus accessories. It also seems likely that Apple will bring its 3D Touch technology to the iPad Air and iPad Mini lines in 2016, improving their functionality.
Meanwhile, from a software perspective, Apple's new focus on business apps should drive strong iPad sales growth in the enterprise market in 2016 and beyond. Last year, Apple partnered with IBM in an initiative that calls for IBM to develop more than 100 business apps for iOS. IBM will use its own sales force to sell these apps, along with cloud services, Apple hardware, and AppleCare support.
So far, IBM has delivered 55 of its new MobileFirst apps, with the rest scheduled to arrive before the end of 2015. That means IBM will deliver nearly as many new business apps in the next few months as it did in the past year. The growth in iOS enterprise software offerings will thus probably have its biggest impact on iPad sales growth in 2016 and beyond.
Apple also announced a new partnership with Cisco in late August, which could help drive sales growth in the enterprise market starting next year.
A sales rebound is coming soonEarlier this year, I predicted that the iPad product line would return to growth this quarter. That goal now seems overly ambitious, because Apple didn't launch a new 9.7-inch iPad this fall. Additionally, even if the iPad Pro generates a lot of interest, it could face severe supply constraints this quarter.
Nevertheless, I expect a return to growth -- at least in terms of revenue -- by the second quarter of Apple's fiscal 2016, driven by easing supply constraints for the iPad Pro and rising enterprise adoption. Furthermore, when Apple finally releases its next 9.7-inch iPad, it should stimulate a wave of upgrade demand. That should be enough to get the iPad back on a strong multi-year growth trajectory.
The article 2016: The Year the iPad Comeback Begins 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 owns shares of and recommends Apple. The Motley Fool recommends Cisco Systems. 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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