Tablet Makers: Which Are Buys?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) has a huge presence in the tablet market. But other companies are increasing their presence in this lucrative market and are challenging Apple through higher margins.

Since there are several up-and-coming firms in this space in addition to Apple, investors now have choices between different tablet stocks. Which, if any, tablet-making companies are valued at attractive prices?

Taking a Bite out of Apple

Apple might be perceived to be an unyielding leader in the tablet market, but its dominance in this market decreased in the third quarter as its tablet market share slipped from 66 percent to 50 percent. This slump coincides with the three months of increasing demand of products from competing firms Amazon (NASDAQ: AMZN) and Samsung.

Worldwide shipments of the iPad increased 50 percent to $27.8 million during the period. Though a 50 percent increase in sales is not bad news, it posted weaker growth than the results of competitors whose sales have doubled production (100 percent increase). Samsung manufactured and shipped 5.1 million of its Galaxy tabs in the same period, which is more than double previous numbers. Similarly, Amazon grabbed a higher market share, almost doubling their share to nine percent from 4.8 percent.

Apple bulls deny that competitors are catching up. They speculate that Apple's customers could be waiting for the iPad mini, which could have inspired them to hold off buying the newest full-size iPad. The iPad mini will come into a market with many cheaper tablets from Amazon, Samsung, and even Google (GOOG). The iPad mini already went on sale at the start of November, but as a Wi-Fi only tablet.

The announcement of the iPad mini might have held off purchases, but Apple is still expected to sell its newest iPad briskly when the mini rolls into stores. The starting price of $329, however, is perceived as too high, which can also allow other tablet vendors to build on their already high revenues.

Smaller and Cheaper

Don't forget Barnes & Noble (NYSE: BKS) which launched its newest Nook HD+ reading device. The company boasts that its newest device is not only cheaper, but less clunky and lighter than Apple's iPad. The new Nook is a compact 9-inches and is also around 25% lighter than the full-size iPad. Moreover, the iPad model sells for at least $499, the Nook HD+ be sold for as low as $269.

Are electronic reading devices surrogates for tablets? To be clear, this newest Nook is a more direct threat to the Amazon's Kindle Fire since it is positioned as an electronic reader and retails at a similar $299 price point. However, both Barnes & Noble and Amazon tablets do much more than just access and display eBook content. These systems feature improved speed and screen resolution. The Nook's video system will give consumers access a paid service for movies and television shows from various studios and channels. Like a tablet, Nook content also taps into cloud computing, allowing files to be accessed on other devices.

More Entrants

iPads, Kindle, and Nook devices face even more competition from Microsoft (NASDAQ: MSFT). Microsoft is making its highly anticipated debut in the tablet market with its Surface RT, which is priced at $499, which will compete directly with Apple.

The Surface is available through Microsoft retail stores and online for order and comes loaded with the latest version of the Microsoft operating system. Taking this big step, Microsoft has clearly sensed the growing market tablets over traditional laptops and desktop computers.

The $499 price point may mark the beginning of a price war. IDC analyst Bob O'Donnell said, "Everything is pulling tablet prices down to below $500, so anything over $500 -- that is a tablet that is going to look expensive."

This lower price has already inspired price competition from other mobile device makers. Apple's latest 16 GB iPad matches the $499 pricing of Microsoft's 32GB Surface RT.

Many companies are launching some form of tablet. Hewlett-Packard (NYSE: HPQ) has even joined the pack, moving into the business-focused tablet market is one small, tactical move to dominate this niche market. Hewlett-Packard intends to differentiate this product to avoid direct competition with Apple's iPad in the consumer space.

Predictable Price Cuts

The tablet price wars should not come as a surprise. Each device maker is trying to ensnare consumers in its platform and is using lower device prices to do so. Once committed to a platform, that consumer will purchase media such as apps or eBooks countless times. These device makers are willing to squeeze margins or even accept a loss on their devices to populate to lure consumers to their platforms.

This is tech’s strategy, the same strategy dominates printer and ink pricing. Companies sell printers at lower margins in order to gain customers who buy compatible ink cartridges over and over again.

From this perspective Microsoft's venture into mobile devices makes less sense because it does not have the catalogues of content or apps which are already written and developed on other platforms. Microsoft may be late to the tablet party.

Valuations

First, we should check to see if any of the firms engaged in this endeavor have stocks that trade at attractive valuations:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> </tr> <tr> <td> <p>AAPL</p> </td> <td> <p>Apple</p> </td> <td> <p>12.18</p> </td> <td> <p>3.23</p> </td> <td> <p>4.27</p> </td> </tr> <tr> <td> <p>AMZN</p> </td> <td> <p>Amazon.com</p> </td> <td> <p>3247.86</p> </td> <td> <p>1.8</p> </td> <td> <p>13.64</p> </td> </tr> <tr> <td> <p>BKS</p> </td> <td> <p>Barnes & Noble</p> </td> <td> <p>NA</p> </td> <td> <p>0.13</p> </td> <td> <p>0.97</p> </td> </tr> <tr> <td> <p>GOOG</p> </td> <td> <p>Google</p> </td> <td> <p>20.44</p> </td> <td> <p>4.51</p> </td> <td> <p>3.15</p> </td> </tr> <tr> <td> <p>HPQ</p> </td> <td> <p>Hewlett-Packard</p> </td> <td> <p>NA</p> </td> <td> <p>0.22</p> </td> <td> <p>0.86</p> </td> </tr> <tr> <td> <p>MSFT</p> </td> <td> <p>Microsoft</p> </td> <td> <p>15.57</p> </td> <td> <p>3.35</p> </td> <td> <p>3.53</p> </td> </tr> </tbody> </table>

Apple stock is the best investment on this list because it remains dominant in the tablet space, is among the top smartphone devices, and trades at reasonable valuations. It is a clear pick over Microsoft which is trading at higher price multiples but is a newcomer in the tablet market. Hewlett-Packard was unable to generate positive earnings over the past twelve months, nor is its venture into the tablet space a large part of its business strategy. Overall, Apple is the best investment among these three stocks.

Invest to Impress

Apple announced sales of 3 million new iPads and iPad minis. Will that be enough to keep Apple the dominant tablet player as threats grow in the space? By picking up a copy of The Motley Fool’s premium research report on Apple, you'll learn everything you need to know about the launch, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus