10 Million Orders For "Small" iPads: What it Means
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Yesterday, The Wall Street Journal reported that Apple (NASDAQ: AAPL) suppliers have received orders for parts for more than 10 million "small" iPads for Q4 (Apple's FQ1). According to The Los Angeles Times, this number would represent twice the number of Kindle Fire tablets ordered by Amazon.com (NASDAQ: AMZN). What does an order of 10 million so-called iPad minis mean for Apple investors? What does it mean for the intense competition from Google's (NASDAQ: GOOG) Nexus 7 and Amazon's Kindle Fire, the two top-selling 7" tablets?
1. Apple is not worried about demand for its "small" tablet. 10 million iPads would blow away Amazon's Kindle Fire holiday sales, if the LA Times report is accurate regarding Amazon's order for only 5 million units during the holidays. Selling those 10 million units should be attainable: Consider Apple's Q3 iPad sales of 17 million, the first period in which the new iPad was available for an entire quarter. Keep in mind this was not a holiday quarter, and the iPad mini is suspected to launch during the holiday quarter.
2. Apple could sell a record 30 million iPads in FQ1. RBC Capital Markets analyst Amit Daryanani estimates that Apple will sell close to 22 million iPads and at least 8 million iPad minis. Based on sales of 17 million iPads in Q3, Apple's usual holiday fever, and a late October launch of the iPad mini, a record 30 million iPad unit sales could be possible. This would represent 100% growth over last year's 15 million units sold.
3. In per-share terms, 10 million iPad minis represents only about a $0.66 EPS contribution to holiday earnings. Based on Apple's Q3 numbers, 10 million iPad unit sales represents about $5.53 billion in revenue. Using Apple's overall net profit margin of 20.7% as a benchmark, we can estimate that the iPad added about $1.1 billion ($5.53 billion x 0.2) in net income to the quarter. Assuming the entry price for the iPad mini is $299, the iPad Mini's contribution to quarterly earnings should represent about 60% of 10 million units worth of iPad earnings. In other words, 10 million iPad mini units would result in approximately $0.66 EPS (1.1 x 0.6) during the holiday quarter.
The bottom line
The iPad mini's contribution to Apple's holiday earnings will likely represent only a tiny sliver of the entire pie. But the implications of 10 million units are, nonetheless, impressive. 10 million units should easily surpass Kindle Fire and Google Nexus 7 sales. But even more noteworthy are the strategic and market implications: 10 million small Apple tablets would represent a disruptive force in the 7" tablet market, making Apple a considerable threat to Amazon and Google and possibly even snatch the crown of market leader in just one quarter.
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