Apple iPad Demand: What's the Real Story?

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NEW YORK ( TheStreet) -- As we head into the most important earnings release Apple (AAPL) has ever had, demand concerns are popping up left and right. First, there were worries about the iPhone, now we're hearing about iPad concerns. What's the real story?

Reuters has a report that Sharp has cut output for iPad screens, suggesting that demand is slowing for the full tablet, shifting to the iPad mini.

This isn't anything new. Wall Street has been expecting that iPad mini sales would cut into the 9.7-inch iPad tablet sales since the product was announced in October . Investors must also bear in mind that Apple has multiple parts suppliers for screens, including LG.

Concerns over rivals overtaking the iPad appear to be speculative at best, with companies like Google (GOOG) and Amazon (AMZN) having limited success with their tablet offerings. Only Samsung has managed to grab significant market share, but Apple still holds a dominant portion of the market, with 53.8% according to IDC.


It's become "cool" to hate Apple now. "I can't believe liking Apple is now contrarian," said a hedge fund analyst, who declined to be named. The analyst, who has a position in the company, has been buying shares on the way down as Apple hit its all-time high in September, only to retreat below the $500 level earlier this week.

The iPad mini has proved a hit, with Apple announcing it sold over 3 million fourth-gen iPads and iPad minis the first week both tablets were available. A look at Apple's Web site shows the iPad mini is still in backorder, with consumers having to wait a week for the various models.

While demand has never been an issue, margins are another story. Most analysts believe that the iPad mini has lower gross margins than the full iPad, and that's causing some concern. JPMorgan analyst Mark Moskowitz believes that the iPad mini "appears to be grabbing a bigger part of the mix" in terms of the overall market. He expects iPad ASPs (average selling prices) to come down as a result.

However, there is a ray of hope. Moskowitz believes the iPad mini actually has better margins than the iPad. "The silver lining here is that our research indicates that gross margin on the iPad mini could be better than the larger iPad, which is partly why our consolidated gross margin assumptions are improving for the Dec-Q and out quarters," Moskowitz wrote in a note. He rates Apple "overweight."

Demand for the iPad and iPad mini is not shifting to other companies, it's shifting between Apple products. CEO Tim Cook has repeatedly said Apple doesn't worry about cannibalizing its own offerings. "... So we've learned over the years not to worry about cannibalization of our own products, it's much better for us to do that than somebody else to do it...," Cook said on Apple's fourth-quarter earnings call. He noted that there are still over 300 million PCs being bought each year, and that Apple would rather eat into that market than worry about cannibalizing itself.