Analysis of Apple’s iPad 2

After launching the much-hyped tablet computer, iPad, on April 3, 2010 in the U.S., Apple Inc. (AAPL) introduced iPad 2, its second generation tablet computer with additional features. Despite the buzz about the new iPad, the company’s shares rose a modest 0.8% or $2.81 per share and closed at $352.12.

Old vs. New iPad

Most of the functionality and appearance remains the same in both the iPad versions. The tablet computer can be used for web browsing, reading and sending emails, viewing photos, watching videos, listening to music, playing games and reading ebooks. Further, both versions have a battery backup of 10 hours and can be used for a month on standby without charge.

While both versions have an LED-backlit LCD touchscreen that measures 9.7 inches (25 cm), the new iPad 2 is 33.0% thinner and up to 15.0% lighter. The first iPad weighed around 1.5 pounds and iPad 2 weighs closer to 1.3 pounds. The iPad 2 is 8.8 millimeters thick compared with13.4 millimeters for the first version iPad.

In terms of speed, the iPad 2 features a dual-core A5 processor chip for enhancing graphics capabilities. Apple commented that the graphics performance of iPad 2 would be nine times faster and that standard calculations would be twice as fast as its predecessor.

Moreover, iPad 2 has dual cameras for video conferencing, including a front-facing VGA camera for FaceTime and Photo Booth, and a rear-facing camera that captures 720p HD video. The previous version lacked the second camera, and given its speed limit more than one app could not run on the iPad at the same time.

iPad 2 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.

iPad 2 is available in black and white models and will be distributed via both the AT&T (T) and Verizon (VZ) 3G networks. The previous version of the iPad was only available through AT&T.

Most importantly, the launch price of iPad 2 is same as the first version. The iPad 2 will be available in the U.S. on March 11 for $499 for the 16GB model, $599 for the 32GB model and $699 for 64GB (only for the Wi-Fi model).

The other model with both Wi-Fi and 3G will be available at $629 for 16GB, $729 for 32GB and $829 for 64GB. On March 25, Apple will begin shipping iPad 2 overseas, reaching out to 26 countries including the U.K., Germany and Japan.

Our Take

With several new entrants flocking to the market, the competition for iPad is heating up. Apple’s competitors in the tablet market already include Dell Inc. (DELL) (Streak tablet), Samsung (Galaxy Tab), Toshiba (SmartPad tablet), Acer and Lenovo, most of which are based on Google’s (GOOG) Android OS. Hewlett-Packard’s (HPQ) “Slate,” introduced in January and Panasonic’s (PC) “Toughbook” might increase competition for the iPad. Tablet launches expected this year, including Motorola’s Xoom and Research in Motion’s (RIMM) PlayBook will add to the competion.

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.

Apple’s share of the global tablet market reached 85% at the end of 2010, according to research firm eMarketer and with the new iPad, the company is expected to capture further market share. Apple will sell an estimated 34 million iPads in 2011, three times more than the 10 million tablets expected to be sold by its rivals as per eMarketer.

The older version iPad is currently available in 46 countries globally. Apple sold nearly 15 million iPads in 2010, generating about $9.5 billion in revenue. Total iPad units sold in the recently concluded first quarter of 2011 were 7.3 million, up from the previous quarter’s sale of 3.0 million units. We believe that the international roll-out will lead to increased revenues and higher margins from additional sales.

According to the research firm IDC, Apple continues to dominate the tablet market with approximately 80% market share in 2010, despite a host of rival products. For 2011 and 2012, IDC expects media tablet shipments to increase to 44.6 million units and 70.8 million units, respectively, up from 17 million tablets in 2010. We believe that iPad 2 has the potential to help Apple sustain the momentum in its revenue and earnings.

Expectations Remain Upbeat

We continue to believe that Apple will outperform its peers, given its strong iPad and iPhone sales and new product launches. The company is expected to benefit immensely from the launch of the new iPad.

Overall, Apple’s earnings performance has been way above expectations. Over the last four quarters, Apple surpassed the Zacks Consensus Estimate by 21.3%. The outlook for Mac, iPad and iPhone remains optimistic, backed by domestic and international demand, boding well for Apple’s revenues and earnings.

The current Zacks Consensus Estimate calls for $5.26 per share in earnings for the second quarter of 2011, much above the company’s own expectation of $4.90 per share. The iPad 2 will have a limited effect on estimates for the second quarter of 2011 since it is expected to be shipped in March.

The current Zacks Consensus Estimate for 2011 is $23.00 per share in earnings, which is an increase of 51.8% from 2010. We remain optimistic on Apple’s ability to post stronger results in 2011, driven by an increased demand for iPad and iPhones.

We believe that the addition of Verizon Wireless (in addition to AT&T) for its iPhone and iPad distribution will help Apple reach new heights. With the introduction of iPad 2, we believe the company’s long-term growth story becomes more visible.

We have an Outperform rating on Apple over the long term. The stock has a Zacks #2 Rank, or a short-term Buy rating.

By: Priyanka Poddar

APPLE INC (AAPL): Free Stock Analysis Report

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