Accounts for about 7% of stock priceAccording to a recent survey, Apple’s iPad is expected to be a seasonal favorite during the holidays with 9% of holiday shoppers planning to buy an iPad in the next 90 days. []
Apple competes with players like Hewlett-Packard, Dell, LG Electronics (SEO:066570), Research in Motion, Samsung Electronics (SEO:005930), Toshiba (TYO:6052), and Cisco that all have or plan to launch tablets, as well as Amazon that sells the well known Kindle e-reader.
Despite the large amount of attention the iPad receives, we estimate that the iPad constitutes only 7% of Apple’s intrinsic stock value and therefore any significant jump in sales would have a limited independent impact on Apple’s stock. Further, we anticipate that declining iPad gross profit margins in coming years could pose a headwind to the iPad unit’s profitability and restrict additional upside to Apple’s intrinsic value.
Our price estimate for AAPL still remains roughly 32% above market value, at $418.
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iPad Unit Sales Could Surprise, but What is the Impact?
We estimate that Apple could sell around 12.5 million iPads for 2010, having already sold around 7.5 million iPads through the end of September 2010. According to Gartner, a market research firm, tablets market sales could triple to around 55 million by 2011, [] well ahead of our 20 million estimate.
Although holiday season sales could surprise, we still note a price sensitivity for Apple stock of less than 1% to a 10% change in 2013 iPad unit sales.
Competition Could Pressure iPad Pricing and Profit Margins
Another headwind to iPad profitability stems from declining profit margins. We estimate Apple’s average iPad price to be $640 in 2010, a notable premium compared to the Amazon’s Kindle priced at $189 and netbooks which typically cost below $400. If Apple cuts iPad prices aggressively in the future to remain competitive with other tablet/netbook/e-reader manufacturers, profit margins will be negatively affected.
We estimate Apple’s iPad profit margin will be around 30% for 2010 [] and anticipate a gradual decline in the years ahead limiting the company’s profitability from any substantial pickup in iPad sales. In another article we wrote how competitors with smaller tablets, added features and the popular multi-media player Adobe Flash – which the iPad does not support – might add competitive pressures that could weigh on margins. (See Ipad’s Challenge for Next Year.)
While we are optimistic on Apple overall, the benefit to its stock price from the iPad could be limited for the time being.
Our complete analysis for Apple’s stock is here.
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