The "worst is over for iPad," predicted the well-known Apple analyst Ming-Chi Kuo from KGI Securities in a note to investors last week. The company's sustained period of year-over-year declines in iPad revenue over the past year and a half is about to reverse, he believes. The catalyst for the reversal? Apple's new Microsoft Surface-like 13-inch iPad Pro.
iPad Pro. Image source: Apple.
Continue Reading Below
The iPad decline: Cause for concern?Apple's year-over-year declines in its iPad revenue during the past year and a half has been a real concern for investors. The segment's revenue has been declining, year over year, for six quarters in a row. And the decline has been steep, with year-over-year decreases ranging from 8% to 29%. Even more, the drop has been worse in recent quarters, will Apple reporting year-over-year decreases in iPad revenue of 22% or worse in each of the last three quarters.
These declines, however, have been drowned out by Apple's thriving iPhone business, which has grown by year-over-year rates between 55% and 59% during the past three quarters. With iPhone sales accounting for 63% of Apple's revenue, compared with the iPad's 9% of revenue, the impacts of dwindling iPad sales have been hardly noticeable.
Despite the incredible recent success of Apple's iPhone business, investors have good reason to be concerned about declining iPad sales. As Apple approaches a season of incredibly tough comparisons for iPhone sales, and year-over-year declines in iPhone sales become a possibility, year-over-year decreases in Apple's iPad segment could become more salient.
Is an iPad rebound around the corner? Kuo argues that the higher average selling prices of Apple's new iPad Pro, which starts at $799 compared with the company's starting price for its iPad Air at $499, will help drive revenue for the segment higher, going forward. Of course, these effects on average selling price won't show up when Apple reports its fiscal 2015 fourth-quarter results on Tuesday, since Apple doesn't begin delivering the product until next month, he noted. So if this reversal occurs, it's probably not going to begin until Apple reports its first fiscal quarter of 2016, which is the fourth calendar quarter of 2015.
Key to Kuo's thesis for the reversal of Apple's iPad business is that the larger iPad Pro is a popular enough product with consumers to make a big enough dent in Apple's iPad sales to have a meaningful impact on the segment's average selling price. Is there a big enough market for a larger iPad to justify Kuo's confidence in the product?
To predict the popularity of the device, investors can look over to sales of Microsoft's Surface, which is a similar product. Surface revenue in Microsoft's fiscal fourth quarter of 2015, which is the second calendar quarter of 2015, were up 117% to $888 million. The year-over-year increase was driven by sales of its Surface 3 and Surface Pro 3 -- both larger devices than Apple's iPad Air. The company's just-reported first fiscal quarter of 2016, however, did note a year-over-year decline of Surface revenue, falling from $908 million to the year-ago quarter to $672 million; but this was expected, given the quarter preceded the expected refresh of the Surface line ahead of the holidays.
Microsoft Surface Pro 4. Image source: Microsoft.
Going forward, Microsoft expects more year-over-year growth for its Surface lineup.
"With the strong Surface holiday lineup, we expect revenue to grow in Q2," Microsoft management said during the company's first-quarter earnings call.
That Microsoft's Surface sales are approaching $1 billion is a testament to the opportunity for Apple. If Microsoft -- even with its incomparable suite of complimentary hardware products and a far smaller existing user base for its products -- can solicit sales like this for its larger Surface line, it's a good sign for Apple's foray into a larger tablet screen size.
Sure, as an approximately $1 billion business, Microsoft's tablet segment isn't perfectly comparable to Apple's $10 billion-or-so iPad business. But Microsoft's relative success this early in the company's early efforts to ramp up its tablet sales is notable.
Chances are there's a large enough market for a larger iPad to help Kuo's prediction play out in the coming quarters.
Looking ahead, investors should turn to comments from management on Apple's iPad business during the company's upcoming earnings call to gain some insight into how confident the company is in its higher-priced iPads. Further, in the coming quarters, investors should check in on iPad revenue to see if higher average selling prices do end up having a positive influence on Apple's tablet revenue.
The article Is Apple, Inc.'s Declining iPad Revenue About to Reverse? originally appeared on Fool.com.
Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Microsoft. 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.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.