Apple Inc.’s (NasdaqGS: AAPL - News) much-hyped tablet computer iPad2 received a blockbuster response in its debut weekend. Analysts believe that Apple may have sold more than 500,000 iPad2s after retail outlets ran out of the tablet-style device since its arrival on March 11.
iPad2 is available at more than 236 retail stores in the U.S. and also at thousands of AT&T Inc. (NYSE: T - News), Verizon Wireless (NYSE: VZ - News), Best Buy (NYSE: BBY - News), Wal-Mart Stores Inc. (NYSE: WMT - News) and Target Corp. (NYSE: TGT - News) stores.
iPad2 was also available online at Apple’s website, expected to be delivered to customers in less than a weeks’ time. However, due to the exceptionally strong demand, Apple has extended the delivery time to up to a month for online orders.
According to Piper Jaffray, iPad2 sales are expected to surpass the previous estimate of 5.5 million units for the current quarter, which ends on March 31, 2011. The analyst also noted that 70.0% of the iPad2 customers were first-time buyers, which suggests increased product adoption for Apple.
From March 25, 2011, Apple will begin shipping iPad 2 overseas to 26 countries including the U.K., Germany, Belgium and Japan. We believe that the international roll out will be equally successful.
According to research firm IDC, Apple’s share of the tablet market slipped to 73% in the December quarter, from 93% in the September quarter. Samsung, with its Galaxy Tab tablet, which uses Google Inc’s (GOOG) Android, was the only competitor of note, coming a distant second with 17% of market share.
However, IDC expects Apple to maintain 70%–80% market share through 2011, primarily due to the launch of iPad2. Based on IDC estimates, Apple will ship a minimum of 35 million tablets in 2011.
Apple sold more than 300,000 iPads on the very first day of its launch in April, 2010. The company sold more than 15 million in the first nine months of its launch, which included 7.3 million to holiday shoppers during the December quarter.
We believe that strong demand for iPad2 will provide Apple a competitive edge, as competitors, including Motorola Mobility Holdings Inc. (NYSE: MMI - News), Samsung Electronics Co., Research In Motion Ltd. (NasdaqGS: RIMM - News) and Hewlett-Packard Co. (NYSE: HPQ - News) continue to introduce tablet computers to compete with iPad2. According to consultancy firm PRTM, there are 102 tablets from 64 makers either on sale or in the development stage.
iPad2 Features
The new iPad2 comes with essentially the same appearance but with some functional improvements from its original version. The most significant of these is the two-way camera system, including the front facing VGA camera and the rear-facing camera that captures 720 pixel (0.7 mega pixels) HD video facilitating video conferencing. It also has the Photo Booth software for capturing video and still images.
The speed enhancement is also significant, with the new A5 processor chip expected to be nine times faster and deliver superior graphics performance.
The previous version lacked the second camera and given its speed limit, more than one application could not run on the iPad at the same time.
The iPad2 comes with a LED-backlit LCD touch screen that measures 9.7 inches (25 cm) and weighs a mere 1.3 pounds, which is at least 15.0% lighter than the previous version. The iPad 2 is only 8.8 millimeters thick making it 33.0% thinner than the original version.
iPad 2 is available in two colors, black and white and comes with iOS 4.3, the latest version of Apple’s mobile operating system, with new features including Safari mobile browsing performance, iTunes Home Sharing and AirPlay. There are 65,000 apps specifically made for the iPad available at the Apple app store.
However, iPad2 does not have a USB or SD port and does not support 4G wireless. Apple’s reluctance in using Flash is a defect in our view, as it still makes up a large portion of interactive and animated Web content compared to HTML5, which will take some time to ramp (not before 2014).
iPad2 is priced in the range of $499 to $829, depending on storage space and cellular connectivity. The 16GB model is priced at $499, the 32GB model will cost $599 and the 64GB model (Wi-Fi only model) costs around $699.
The other model with both Wi-Fi and 3G will be available at $629 for 16GB, $729 for 32GB and $829 for 64GB. The fact that there is no contractual commitment for 3G models hugely differentiates iPad2 from other Android tablets, many of which require multi-year data contracts.
According to a survey conducted by Piper Jaffray, 47% of customers paid an extra $130 for a 3G model, while 41.0% bought the 32GB model, rather than the entry-level 16GB model.
According to the research firm IHS ISuppli, materials used in the iPad2 cost about $326.60, up from $320.0 for the earlier version. However, we believe this increase in material cost will not have any significant effect on iPad2 pricing.
Recommendation
Despite some minor glitches, iPad2 will be a major revenue contributor for Apple, in our view. Apple is bent on protecting its share in the tablet market through the launch of iPad 2. The aggressive pricing, with the start-up model at $499 appears much better than Motorola’s Xoom, which is priced at $800.
We continue to believe that Apple will outperform its peers given its strong iPad and iPhone sales and new product launches.
We have an Outperform rating on Apple over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, implying a short-term Buy rating.
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