As Gary Krakow reported, tablet sales for all these companies have "hit a wall." Worse, the industry is being rapidly commoditized and consumers are choosing cheap, low-margin Android tablets over more expensive models, according to Strategy Analytics.
This is why Apple, Google and the rest of the tablet makers are going to have to shift their focus to getting more businesses to use tablets if these companies are going to boost sales.
These companies have seen that on the consumer end the slowdown in U.S. tablet sales has been happening much earlier than expected. Only 40% of homes have tablets, including Amazon's Kindle Fire, according to Asymco, and sales of personal computers, are also slowing.
What does this mean for investors?
From a stock perspective, not much at the moment. Apple's shares, at $97, are up 21% after its latest earnings report. Google, at $603, is up about 8%. Microsoft stock is up 20% and sells close to $45.
But if you want those shares to go higher, tablet sales must also rise. Microsoft's, Google's and Apple's tablets are victims of their own success. They are mainly being bought for home use as devices for looking at media -- movies, TV, and books. They are rugged, with no moving parts or fans that can break. Since storage is based in the cloud they don't require more memory.
As a result, average selling prices are plunging, with grocery stores now selling them for under $200. The devices are being positioned as mobile TVs and you're not going to get sales growth selling TVs.
The answer is the mobile network connection. WiFi is great but it's static. Phone networks are ubiquitous, so their apps can be accessed anywhere and are. This means phones go out in the world, where they can be hurt, lost or stolen. Phablets, in the end, are just bigger phones for those with bigger hands and poorer eyes. The upgrade and replacement cycles on phones, in short, are constant. The market for mobile phone repair is soaring.
By contrast, Jaxon Lee of BestBuy Mobile calls tablets a "transitional technology" -- like the MP3 player. Touch-enabled Chromebooks will replace them at the low end and higher-powered PCs will replace them at the high end, he predicts.
So can Apple, Google et al continue to make money with tablets? Yes, if they target the enterprise market, which puts another gloss on the recent deal between Apple and IBM (IBM) . The growth of "enterprise apps," for accessing files, business intelligence and editing documents, is accelerating, according to Good Technology, with financial services companies, utilities and the energy sector leading the way. All these apps need high security, the kind of system integration work for which IBM is known.
The success of tablets in the enterprise market may point the way for Google as well. By unifying the Android and Chrome operating systems, creating tablets as a ruggedized addition to the Chromebook market, Google could rebuild the high end of its market and improve the upgrade cycle. James Kendrick of ZDNet says that's precisely what Google is planning on doing.
What the tablet market's evolution demonstrates, in the end, is the importance of software and the upgrade cycle. This is the difference between most consumer electronics and computing. A TV is just a TV but a PC can drive change. Making the tablet a rugged PC is the way forward.
At the time of publication the author had a position in GOOGL, AAPL and AMZN.
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 a few notable strengths, 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 solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 8.5%. Since the same quarter one year prior, revenues slightly increased by 6.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Although AAPL's debt-to-equity ratio of 0.26 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 1.18, 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.
- 44.56% 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 20.69% is above that of the industry average.
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 55.53% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AAPL should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- You can view the full analysis from the report here: AAPL Ratings Report