Understanding Apple

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

One point that has been overlooked in  Apple's (NASDAQ: AAPL) September iPhone 5 event is the brief statement by Tim Cook that Apple sold “more iPads than any PC manufacturer sold of their entire PC line.” I would like to examine the implications of this.

Data

Gartner reports the following chart for worldwide Q3 PC sales:

Table 1
Preliminary Worldwide PC Vendor Unit Shipment Estimates for 3Q12 (Units)

<table> <tbody> <tr> <td> <p><br /> <strong>Company</strong></p> </td> <td> <p><strong>3Q12 Shipments</strong></p> </td> <td> <p><strong>3Q12 Market Share (%)</strong></p> </td> <td> <p><strong>3Q11 Shipments</strong></p> </td> <td> <p><strong>3Q11 Market Share (%)</strong></p> </td> <td> <p><strong>3Q12-3Q11 Growth (%)</strong></p> </td> </tr> <tr> <td> <p>Lenovo</p> </td> <td> <p>13,767,976</p> </td> <td> <p>15.7</p> </td> <td> <p>12,536,756</p> </td> <td> <p>13.1</p> </td> <td> <p>9.8</p> </td> </tr> <tr> <td> <p>HP</p> </td> <td> <p>13,550,761</p> </td> <td> <p>15.5</p> </td> <td> <p>16,217,987</p> </td> <td> <p>17.0</p> </td> <td> <p>-16.4</p> </td> </tr> <tr> <td> <p>Dell</p> </td> <td> <p>9,216,638</p> </td> <td> <p>10.5</p> </td> <td> <p>10,676,513</p> </td> <td> <p>11.2</p> </td> <td> <p>-13.7</p> </td> </tr> <tr> <td> <p>Acer Group</p> </td> <td> <p>8,633,267</p> </td> <td> <p>9.9</p> </td> <td> <p>9,616,572</p> </td> <td> <p>10.1</p> </td> <td> <p>-10.2</p> </td> </tr> <tr> <td> <p>ASUS</p> </td> <td> <p>6,380,690</p> </td> <td> <p>7.3</p> </td> <td> <p>5,708,807</p> </td> <td> <p>6.0</p> </td> <td> <p>11.8</p> </td> </tr> <tr> <td> <p>Others</p> </td> <td> <p>35,954,748</p> </td> <td> <p>41.1</p> </td> <td> <p>40,683,666</p> </td> <td> <p>42.6</p> </td> <td> <p>-11.6</p> </td> </tr> <tr> <td> <p><strong>Total</strong></p> </td> <td> <p><strong>87,504,080</strong></p> </td> <td> <p><strong>100.0</strong></p> </td> <td> <p><strong>95,440,301</strong></p> </td> <td> <p><strong>100.0</strong></p> </td> <td> <p><strong>-8.3</strong></p> </td> </tr> </tbody> </table>

Note: Data includes desk-based PCs and mobile PCs, including mini-notebooks but not media tablets such as the iPad.
Source: Gartner (October 2012)

In the top spot we have Lenovo (OTC: LNVGY) which edged out HP (NYSE: HPQ). This seems to be a growing trend with Lenovo running strongly in Asia which is still expanding, while HP’s base in the U.S. has shrinking sales. Significantly behind are Dell (NASDAQ: DELL), Acer, and ASUS (PNK: ASUUY).

IDC, the other most recognized data research firm, showed similar results.

But notice Gartner’s note: “Data includes … but not media tablets such as the iPad.”

Add in the iPad

Meanwhile (back at the ranch) Apple reported sales of just over 14 million iPads. This exceeds the Lenovo total of 13.8 M, as noted by Tim Cook. Now Apple also sold 4.9 million Macs. If you add these you get almost 19 M units which greatly exceeds the Lenovo number, putting Apple firmly in the lead.

Now let’s look at projections. According to one report (8 Oct., 2012):

Analyst Amit Daryanani with RBC Capital Markets said in a note to investors on Monday that he expects Apple will sell 21.6 million iPads in the December quarter. But that projection is based only on the current 9.7-inch iPad form factor available from Apple.

If the company were to launch a smaller so-called "iPad mini" in the current quarter, he believes it could result in an 8-million-unit, $2-billion net benefit for the company. That would result in total iPad sales of 29.6 million for the holiday quarter.

At 30 million units that is almost 35% of the Q3 total! Something is shifting here.

BUT…

But –- you say -– an iPad is not a computer, it is only a “media tablet,” and therefore should not be considered a PC.

Really?

  1. PC stands for personal computer.
  2. An iPad is a computer.
  3. An iPad is for personal use.

THEREFORE: An iPad is a Personal Computer. QED.

Is a “media tablet” really a computer?

Let’s look at the definition of a computer (from Wikipedia):

A computer is a general purpose device that can be programmed to carry out a finite set of arithmetic or logical operations. Since a sequence of operations can be readily changed, the computer can solve more than one kind of problem.
Conventionally, a computer consists of at least one processing element, typically acentral processing unit (CPU) and some form of memory. 

By this definition, an iPad – or other tablet – is most definitely a computer. (Note: A device such as Barnes & Noble’s (NYSE: BKS) Nook or Amazon’s (NASDAQ: AMZN) Kindle that is designed with limited functionality -– readers -– and not to be extended with apps, would be in a grey area since internally they run programs, but have been self limited to not accept apps. The Fire is, of course, a full fledged computer.)

BUT – you add – these tablets are really designed just to view media and are not powerful enough to be a real computer.

There are several responses to this.

  1. If you need 5 tons of gravel you might want a dump truck, but that does not mean my little 1989 Toyota ELD is not a truck. It has its limitations, but is still considered a truck -- a pickup truck.
  2. The iPad can do about anything a laptop can do – just a bit more slowly. In fact, the new iPad is probably as or more powerful than a low end netbook of a few years ago. People create all sorts of things on them:
    1. Art
    2. Music
    3. Edit movies
    4. Writing
    5. Databases
    6. Advanced sales data
    7. Spreadsheets
    8. Medical records
    9. View medical charts/graphics
    10. Etc.

There is nothing that another computer can do that cannot be programmed into a “media tablet.”

Granted, it does not have the horsepower of a larger machine, but then a laptop doesn't have the horsepower of a large desktop. Originally, laptops were far too weak to be considered for professional graphic work. Today they are.

There are some serious apps available to do all the things listed above. Sure, a desktop will be a better choice for some of these tasks, especially at the professional level. However, the iPad still can do them.

But media tablets mostly just “consume” data

Hogwash. While usage will show that this may be true, the same can be said for PCs. What percentage of people actually spend a significant proportion of computer time creating things? Outside of the business world, relatively few. Most consumers are playing games, social networking, cruising the net on their computers, and editing/organizing photos and videos.

And when an iPad goes into the business world, it too changes personality to do mostly "serious work" such as sales data collection, medical utility, etc. One can argue that it actually becomes a more personal computer.

Where does this leave us?

Well, it doesn't really change much at all. The sales number of “trad-PCs” does not change at all, nor does the number of tablets. The division is still very important for understanding the market as a whole since the types do represent significantly different classes and do tell us a lot about the overall market movement.

Still, the division is arbitrary, and just as the introduction of the laptop changed the layout of the PC industry, so too the new tablet PCs will change the layout of the current PC industry.

Conclusion

The division of PCs into “real PCs” and “media tablets” is arbitrary. After all, tablets before the iPad were considered PCs. To the investor, the division helps to see the different aspects in greater detail.

However, it also can hide the interaction between the categories. Already we can see how tablets are taking market share from their heftier brethren, and it is likely that next year sales of tablets will be greater than trad-PCs. The tide is shifting for the categories, and with it go the winners and losers among the manufacturers.

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, its products are trend setters, and currently it's trading at rather low multiples, especially regarding forward earnings.

For those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

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Malcolm Manness has a Masters degree in Computer Science, and worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50centflash.com/.

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