Tablet sales powered by Apple’s (AAPL) iconic iPad and Amazon’s (AMZN) cheaper Kindle Fire is expected to increase 21.0% on a year-over-year basis to 106.1 million units for 2012, as per latest data from market research firm IDC. Tablet sales reached a record 68.7 million units in 2011.
The revised forecast is significantly higher than IDC’s prior outlook of 87.7 million units and is primarily based on a consistently strong sales outlook for both iPad and non-iOS tablets.
In fact, IDC expects non-iOS tablet makers, particularly vendors using Google’s (GOOG) Android platform, to surpass Apple in terms of market share by 2015. However, Apple is expected to remain the market leader in terms of revenue through the projected period ending 2016.
Apple Leads the Pack in 4th Quarter 2011
A total of 28.2 million tablet units were shipped in the fourth quarter of 2011, of which 15.4 million were iPads. Amazon sold approximately 4.7 million Kindle Fire units in the quarter and was placed in the #2 spot, with 16.8% market share. However, the lower-priced Kindle was successful in cannibalizing Apple’s market share, which dropped to 54.7% from 61.5% reported in the third quarter of 2011.
Samsung came third, as the company’s market share increased from 5.5% in the previous quarter to 5.8% in the fourth quarter. Barnes & Noble’s (BKS) Nook failed to impress and the company’s market share declined on a sequential basis to 3.5%. Pandigital was placed at the bottom of the table, as the company’s market share declined from 2.9% in the third quarter to 2.5% in the fourth quarter.
Platform-wise, Apple maintained its dominance, although iOS market share declined from 61.6% in the third quarter to 54.7% in the fourth quarter. Android gained strongly, its share of the market increasing from 32.3% in the third quarter to 44.6% in the fourth, primarily based on strong sales of Kindle Fire.
What’s in Store for Tablet Makers?
We believe that the tablet market will remain a duopoly (in term of OS) for some time and the rivalry between iOS and Android will increase going forward. However, the increasing competition will benefit customers as pricing will be a major factor going forward. Although lower pricing will boost volumes, margins will suffer and this will be difficult for companies to endure over the long term.
We believe that Apple is well placed in this respect, as it continues to enjoy the first mover advantage, boldly refusing to sell its products at a lower price. We believe that Apple will continue to benefit from a loyal niche customer base going forward.
However, we believe that the tablet has only penetrated a small segment of the consumer market, that too only in some parts of the developed countries. Apart from the developed countries, there is significant growth potential in the emerging markets of China, India, South East Asian countries and many more. Further, the growing popularity of the device will continue to temper growth in the personal computer market, in our view.
We believe that the tablet market will continue to grow at a much faster rate than overall expectations. According to IDC, approximately 198.2 million tablets will be sold in 2016, which we believe is conservative.
Where Does Apple Stand?
We believe that Apple is well positioned to grab this huge opportunity in the tablet market going forward. The company’s international expansion will drive its market share going forward. However, Apple’s ability to spur the popularity of its products in developing nations, where pricing is often an important consideration, will go a long way in deciding the company’s future growth.
Apple is losing its market share both in terms of units and platform wise. We expect this trend to continue in the near term. Although the upcoming iPad 3 release can be a game changer, we believe that mounting competition will continue to hurt Apple’s profitability going forward.
Moreover, Apple has taken a very aggressive approach toward maintaining its leadership position in the tablet market. The company has taken legal actions against most of its peers alleging patent violations and has been somewhat successful in obtaining injunctions on rival tablet sales in some jurisdictions across the world.
However, these patent suits tend to linger for a long time and it is very difficult to predict a winner right now. This will remain a headwind for the stock going forward, in our view.
We maintain our Outperform recommendation over the long term (6-12 months). Currently, Apple has a Zacks #1 Rank, which implies a Strong Buy rating in the near term.
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