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Apple Leads the Tablet Onslaught

Zacks Equity Research

Apple Inc. (AAPL) ended 2011 as the undisputed leader in the tablet market with a 62% market share, according to data from IHS iSuppli. Apple shipped 40.5 million iPads during the year, the highest compared to any of its peers. Total tablets shipped increased a whopping 194% sequentially.

Moreover, with the 39% sequential increase in fourth quarter shipments, Apple left all its competitors far behind.

Apple’s fourth quarter market share of 57% was less than in the third quarter, but still miles ahead of its competitors. Amazon.com Inc.’s (AMZN) was a distant second with its recently launched Kindle Fire picking up a 14% share of the market (3.8 million units shipped).

Samsung with its Galaxy Tabs was the third in line with 8% market share, representing a 16% sequential increase in shipments. Barnes & Noble, Inc.’s (BKS) Nook came in close to the third-placed Galaxy Tabs. Nook took a 7% share, but notably, its tablet shipments sky-rocketed 156% on a sequential basis.

The sequential decline in Apple’s market share in iPads was traced to the release of iPhone 4S in October that attracted major interest among Apple fans and the public in general. In the Oct- Dec quarter, Apple sold 37 million iPhones, buoyed by robust holiday sales of iPhone 4S.

Another factor that somewhat dented the sequential performance was Kindle Fire. It registered unprecedented success since its release and grabbed 6% market share in 2011. Moreover, price cuts from Android-based manufacturers and freebies being distributed as a promotional activity also helped the sequential increase in non-iPad tablet sales. These factors however did not overshadow Apple’s leadership position in the tablet market.

Come late 2012 and early 2013, analysts from IHS iSuppli predict that there will be a rise of new Windows 8 tablets and ARM microprocessor-based tablets. It is most likely that in the coming months pricing of the device is going to become a larger factor than the niche brand value.

Despite these arguments, Apple’s rumored release of iPad 3 in the second quarter of 2012 has generated tremendous enthusiasm among gadget enthusiasts. Analysts from IHS iSuppli expect the device to enjoy strong sales. The new version of iPad 3 is expected to include features like QXGA retina display with a pixel format of 2,048 by 1,536, with SIRI voice interface that was introduced in iPhone 4S.

Separately, Apple has toppled Samsung to become the leader in the smartphone market in the fourth quarter of 2011. According to the data compiled by research firms Strategy Analytics and IHS iSuppli, Apple returned to its former glory in the smartphone market, buoyed by robust holiday sales of iPhone 4S.

We conclude that Apple remains the biggest growth story, based on its superior product pipeline, Apps, iCloud and iPhone 4S, as well as the upcoming update of iPad and Apple TV. Apple is also well positioned to gain from a loyal customer base and international expansion, in our view.

Particularly, Apple’s expansion in Brazil, Russia and in other emerging economies in the Asia-Pacific region will lead to incremental growth over the long term. 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.

However, legal complexities and patent litigation cases against Samsung will remain the primary headwinds in the near term. Additionally, the company reportedly is entangled in a legal dispute in China pertaining to the “iPad” trademark. This could prove to be a major headwind for Apple, as China is one of the fastest growing markets for the company. Apple’s competitive edge would be adversely affected going forward if it is prevented from selling its iconic tablet in China due to the lingering trade dispute. Moreover, competition from other smartphone and low-priced tablet makers will remain an overhang on the stock.

We maintain our Neutral 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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