The Apple iPad: Overblown? And How!

Apple (Nasdaq: AAPL) released their tablet device in April 2010 to much fanfare. Anyone who has used the device basically loves it, and the price point is pretty much the only thing keeping everyone in the U.S. from owning one. The device has been accepted as a sales device for many corporations, and is widely considered the de facto standard for next-gen tablets (older models were clunkier and required a stylus to operate, making it a little more awkward than simply touching a screen).

But, is the dominance of Apple's device overblown? According to reports, Apple is rumored to have ordered as many as 65 million screens from suppliers, which eclipses analyst estimates calling for 45 to 48 million sales of the device in 2011. Does that seem like a lot to anyone else?

If an interesting, successful device comes out in the free market, chances are real good that competitors will flood it with their own creation. Just look at MP3 players and touch screen phones as two examples.

Is a 12 to 18 month time lag too great to overcome? Back when other mega-conglomerates were first starting, it would take years before another worthy competitor would pop up. Can you name two great (bad) airlines? Two famous soda pops? Several luxury automobile brands? As an example, McDonald's (NYSE: MCD) really took off in 1948 when they implemented an efficient drive-thru, but Burger King still made it big...even though they started some seven years later!

Even though the iPad is an exceptional device, and worthy of its current dominance, competitors are looking to take them down a peg or two. In 2011, you'll see new and improved devices from: Microsoft (Nasdaq: MSFT), Motorola (NYSE: MOT), Research In Motion (Nasdaq: RIMM), Linux, an improved Samsung Galaxy Tab, and more.

Sizes of the devices will also vary widely. Apple only makes their 9.7-inch version right now, but what if you want something smaller? Bigger?

What about brand loyalty? Though many continue to disrespect RIM's BlackBerry, and they have lost some of their mobile market share, a loyal customer base still abounds will will clamor to buy products that they offer.

Just take a look at the bullishness of the iPad (and Apple) from an analyst perspective:

• Goldman Sachs, December 12, 2010. A Buy rating, with 34% potential return noted at the top. Their three key investment criteria? The platform, gross margins, and the iPad push!
  
  Skipping over the first two, the typical "solid product lineup" and a "gross margin dip to set the seeds of success upon launching a new product" and go straight to Goldman's view on the iPad, you can see the real nervousness that Goldman uses in their language, almost to purely appease their clientele.
  
  Goldman notes that Apple's share of the PC market is 4.4% as of last quarter, the best its been since 1996! They believe that that number will only increase modestly in FY11, but note that the estimate is meaningless should the iPad be considered a probable replacement to a netbook or notebook (or desktop, in some extreme cases). Including iPads in their forecast means that Apple will comfortably have a 12% PC market share in FY11, when you look at iPads and Macs combined.
  
  They aimlessly surmise that, "By leveraging the iTunes and App Store components of the platform, Apple's unique tablet design has been able to potentially produce the most disruptive force to Wintel computing in the history of the PC industry."
  
  In terms of cannibalization by the iPad, Goldman says "Not to worry!" Gross margin on an iPod is $47.58, $330.21 for Macs, and $231.05 for an iPad (on average). In terms of trading up from an iPod, that a good thing, but in terms of trading down from a Mac? Goldman notes, "On the Mac side, the far greater TAM opportunity and near-parity versus profits for Apple’s low-end notebooks suggests that investors should be relatively indifferent between an iPad or a Mac sale. In fact, we’d argue that if we assume the iPad is a personal computer, then the device should allow Apple to gain a far larger revenue and profit share in the PC market than the Mac ever could."
  
  Goldman forecasts the sale of 37.2 million iPads in CY11. They note that the biggest reason for early success is its ties to an already solid platform (iTunes, Apps).
  
  
• December 16, 2010. J.P. Morgan said that they were raising their iPad numbers significantly! They believe that Apple will retain 61% of market revs through FY12. JPMs looking for the sale of 26.64 million units in FY11 and 32.82 million in FY12.
  
  They think that "Android-based smartphones, at least initially." Think again, J.P.
  
  
• Also December 16, 2010, Kaufman Bros. joined the party. They kept their excitement relatively calm, but increased their quarterly sales target on iPad from 5.5 million units to 6.1 million units.
  
  
• Janney got sucked into the mix, too! After hearing that "iPads are cannibalizing netbook because the iPad is more powerful because of the Apps available," they raised their Q/Q unit growth estimate to 55% and unit sales to 6.5 million. One way in which they basically say "Apple gets ya," is that most consumers during the holiday season were getting (read: forced to buy) the 32 gigabyte version of the iPad because they were afraid that they will "need the extra capacity" and "cannot add memory" after purchase.
  
  Janney sees FY11 iPad unit sales of 25.2 million and FY12 sales of 32.4 million units.
  
  
• Gabelli, on December 17, 2010, says that revs for the iPad could amount to 24% of the company's total profit in FY11, and see sales growth from FY11 - FY15 at a 63% CAGR. Gabelli's looking for 23.91 million unit sales in FY11 and 35.28 in FY12.
  
  Gabelli says that, "While Apple iPad is currently the incumbent in the tablet computer space, we anticipate more competition from other companies including Samsung Electronics, Research in Motion, Dell, Asus, Acer, Lenovo, and Cisco. We are optimistic that Apple will remain the market leader in tablets"
  
  
• Now they've got James Altucher sipping, nay chugging, the Kool-Aid. In an article this week, he highlights how Apple will become the first company with a trillion dollar market cap! Numbers Altucher throws out include:
  • iPad sales in the 10 - 12 million range for 2010
    
    
  • 30% gross margin on iPad for app sales, 10% on iPad iTunes sales
    
    
  • Assumes Apple will sell 50 million iPads next year
    
    
  • Also assumes a modest doubling of sales through 2013, amounting to 200 million iPads. With 30% gross margin, that's $30 billion in gross profits
  He also mumbles out something like "30 year relationship with Apple" and "crying when [his] dad took back his work's Apple II+" and "already has two iPads, several iPods, etc., etc."
  
  P.S. - A trillion dollar market cap would put shares trading at $1,089, just over three times what it is now. What's next, they're gonna hire Buffett as their CIO?
  
  Keep your eyes peeled next week at the Consumer Electronics Show in Las Vegas, when many will be introducing and finalizing their devices and launch timelines. Samsung has already put up impressive numbers this year for their Galaxy Tab, with last checks have them selling one million units in under two months after launch (early December), and 1.5 million by the end of 2010 (their estimate).
  
  Consumers are hungry for a tablet that fits their lifestyle, and it can sometimes get lonely at the top.

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