Sean Chandler
Research analyst, tech, long-term horizon, value
Oct. 12, 2015 2:59 PM ET
Summary
One top contributor has a strong idea that an ARM-based iPad Pro is a mistake, dooming expensive iPads in the face of cheap Surfaces.
I'm here to assure investors that it's not.
ARM presently has its limitations, but with the level of performance Apple achieves using ARM, it's clear the iPad is becoming the predator in this space.
iPad sales are still going over a "speed bump," but the iPad Pro sets the iPad tablet up for growth over the long run.
Introduction
With all due respect to Alcaraz Research, I must say that I strongly disagree with his negative opinions toward an Intel-less iPad simply due to its lack of a long-term outlook. In a recent article, Alcaraz Research wrote “By not using an Intel processor, Apple intentionally made the iPad Pro less usable/inferior than the much cheaper Surface 3.”
Last quarter, Apple’s (NASDAQ:AAPL) iPad revenue dropped 23% while Microsoft’s (NASDAQ:MSFT) Surface revenue rose 117%, which, in my opinion, makes Alcaraz Research’s statement a serious one because it misleads investors into believing that cheaper Surfaces are superior to much more expensive iPads simply due to the processor. If the iPad utilized an Intel (NASDAQ:INTC) processor that ran OSX instead of iOS, the iPad would surely become more usable. But the term usable would become questionable. Windows 10 still has millions of programs that haven’t been rewritten to be fully optimized for touch. And although these applications run, they simply don’t work in the manner that the crude touch of a finger demands (a touch-enabled OSX would be even worse than Windows 10). On the other hand, everything on iOS works. But without the decades of software accumulation that PC has had, the app base is inevitably limited.
The fact of the matter here is that both Surface and iPad are still burrowing through the outer layer of the tablet PC and that the ideal tablet still requires years of further development. Both Microsoft and Apple have two unique methods that will both likely prevail. And with that being said, investors should find little concern over iPad Pro’s lack of an x86 processor, but rather what the iPad Pro truly is, and that’s a device of enablement. With a vastly improved processor, a larger screen and the long-awaited input of a stylus, customers will find that an explosion in app development is underway, which will serve as the foundation of restoring iPad sales, as well as Apple’s falling stock.
The iPad Pro is a Powerhouse
Before I draw meaning for investors, I’d like to briefly discuss the power of the iPad Pro. If this isn’t your forte, you can skip this section and jump to the next bold line knowing that the iPad Pro’s A9X chip is just fast. Really fast.
In order for a tablet to replace a laptop, the processor in which it utilizes must be at least as powerful as a laptop, while consuming dramatically less power. Microsoft’s Surface Pro 4 is proof that the ideal processor is still in development simply because it still uses a laptop-grade processor instead of a tablet one.
If we look at a comparison of the iPad Air 2’s A8X processor and the Surface Pro 3’s i5 processor, you can get a ballpark understanding of how far Apple has brought up the speed of its processor. In the chart below, you’ll find that the Surface Pro 3 is about 25% faster than the iPad Air 2, which is a noticeable difference. But as I mentioned, the Surface Pro uses laptop grade processors while iPad uses much lower power tablet-grade processors.
Before the iPad Air 2’s leap forward, investors had every reason to be concerned with the iPad’s processor development because it would have needed another decade in order to catch up with laptops. However, the iPad Air 2 boasted a 40% CPU and 2.5x GPU increase over the original iPad Air. Fortunately, with iPad Pro’s A9X chip, this rate of improvement accelerated with a whopping 80% CPU and 2x GPU enhancement in spite of having nearly twice the pixels to push. This is compared to Intel, whose Skylake Core M tablet chip was said to be a 10% CPU increase and 30% GPU increase over the previous Broadwell Core M. This is why the Surface Pro 4 couldn’t fully utilize a tablet processor, and instead had to maintain a thicker, fan-cooled design to compensate for laptop-grade processors.
iPad Pro enables future iPad lineups
A far quicker processor yields a new range of applications, which leads me to the misconception that iOS isn’t a “full” operating system, but rather a “baby” or “limited” operating system. This misconception is simply due to iOS’s lack of major PC programs and its temporary lack of multi-tasking and there are two reasons why these problems exist. First is that the PC has had literally decades to accumulate programs by creative developers while the iPad has only had five. And second is that the much slower ARM processors were formerly incapable of running such sophisticated software. Investors will find fortune that with iPad Pro’s new processor, and with a little more time, this will all change.
iOS developers have proven themselves as outstandingly creative and with every new feature that’s added, whether it’s gyroscopes or 3D touch, comes a barrage of new applications that are born. With iPad Pro, Apple delivered four new features for developers to build on a larger screen, an exceptional processor, multi-tasking, and a new input device – the Apple Pencil. These are all big deliveries that will spark growth in the app database and overall the functionality of the iPad Pro and all future iPads to come.
Reversing iPad sales will take time
It’s no secret that iPad sales are down, and here’s by how much as a rather painful reminder.
For Apple’s fiscal second quarter, the iPad marked its second year of year-over-year declines, and it’s possible that it won’t be the last. The 117% growth of Surface tablets is proof that people don’t want to own tablets as companion devices, but rather as replacement devices. Last year, I wrote that the iPad Air 2 didn’t provide this replacement functionality. And unfortunately, the iPad Pro doesn’t either. However, unlike iPad Air 2, which simply added a leap forward in processing power, the iPad Pro delivers a faster processor, multi-tasking (iOS9), a larger screen, and a new form of input from a stylus.
This is important because it’s a step forward, and that the primary problem with iPads lies with their app base, rather than their processor and with millions of iPads being sold each quarter, developers have plenty of reason to develop for the iPad Pro. Furthermore, with the iPad Pro’s capabilities, a barrage of professional applications costing hundreds of dollars such as AutoCad 360 will surface, which will show that the iPad is going to become a very serious device.
Bottom Line
The problem with the iPad Pro isn’t its processor, at least not anymore. The iPad Pro delivers processing power that’s sufficient for serious app developers to give it a run for its money. The problem is a lack of applications that can be used, which as I’ve covered in this article will only take a short time to resolve.
In most cases, the market wants results and as the world’s most valued company, investors are going to want results. It has been a year since Tim Cook called Apple’s sales a “speed bump,” and this quarter’s results are going to show that we are still going over this speed bump, which may disappoint investors. Because of this, I won’t recommend buying Apple given its 17% standing under its 52-week high. I can’t say that owning Apple is a bad choice. I give the company a hold – at $105 and under I’m a buyer for the long haul.
