Why Reports of the iPad's Death Are Greatly Exaggerated

NEW YORK (TheStreet) -- Apple's (AAPL) fiscal third-quarter financial results were bright overall.

Earnings beat expectations, although the iPhone numbers were slightly below estimates and Apple's revenue projection for its fiscal fourth quarter ending in September was below analysts' forecasts.

Shares of Apple were up 2% in Wednesday morning trading as observers are still excited about the company's products to be rolled out during the fall.

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One weak point in the earnings release stood out, however -- the disappointing iPad numbers. Apple sold 13.3 million iPads during the quarter, which was the lowest level in more than two years.

On the post-earnings conference call, Apple CEO Tim Cook said that, "while iPad met our expectations, we realize that they didn't meet many of yours."

You only have to look at a chart of iPads and iPhones sold over time to conclude that iPads have not only flattened out, but they appear to be in decline.

So there were many on Twitter last night, singing a requiem for the iPad.

One conclusion appears to be that because iPads haven't tracked the success in volume of iPhones, that the product is a failure.

That appears to be a premature conclusion. Here's why.

When iPad was launched in 2010, it was immediately dismissed. Google (GOOG) CEO Eric Schmidt called it nothing more than a large iPhone. Others discussed how Microsoft (MSFT) had already tried to promote a tablet and how it had failed.

The critics were wrong. The iPad is now a multi-billion-dollar franchise for Apple with an astonishing number of iPad-unique applications.

Once the iPad took off in sales, however, some people rushed to label it as the replacement for the PC. The assumption went from "nobody wants one" to "people won't buy a PC anymore." That assumption also appears to be wrong, as consumer usage has waned in comparison with iPhone usage.

But now we are again jumping to a new -- and likely, again, false -- assumption that people don't want a tablet.

How will iPad be used? That's really the central question. We didn't know in 2010, and I still don't think we clearly know today.

It's not an iPhone replacement. It's not a PC replacement. And it's not great as a device to sit on our coffee table and browse while we half-watch TV.

We have never had a tablet like this before, and so we are still figuring out how we will use it, just like we had to do when the iPhone first arrived in 2007.

However, the other day I was waiting for a flight, and instead of sitting in a 30-year-old rack of chairs by the gate, I sat at a table with an iPad on it. I ordered drinks and a snack through it and a server came over within a couple of minutes delivering my order.

It was very efficient, although I had to pay my server instead of swiping a card on the iPad.

In a few years, won't all restaurants be like this? Won't a huge number of servers lose their jobs and effectively be replaced by these iPads? I think they will.

And the iPad should get a boost from Apple's partnership with IBM (IBM), which was announced last week. The deal should help iPad burrow deeply in businesses. IBM will figure out how that will happen.

The iPad will be used in ways that haven't existed before. You couldn't do what they're going to do with a PC. Same with the iPhone. The iPad will be uniquely situated for it.

So hold off on the funeral for the iPad. It's still a huge business with lots of potential.

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AAPL's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 4.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although AAPL's debt-to-equity ratio of 0.14 is very low, it is currently higher than that of the industry average. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 43.45% is the gross profit margin for APPLE INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.39% is above that of the industry average.
  • Net operating cash flow has slightly increased to $13,538.00 million or 8.26% when compared to the same quarter last year. In addition, APPLE INC has also modestly surpassed the industry average cash flow growth rate of 5.16%.

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