The star of last year’s Computex, Asia’s biggest tech exhibition, was Apple’s iPad. Launched a month before the show, it made many of the gadgets on display seem irrelevant. “Major PC and consumer electronics firms were preparing to release tablets… but Apple’s iPad forced them to go back to the drawing board,” said John Morris on ZDnet. There may have been “lots of talk of tablets”, but nearly all were prototypes. As he noted, “in many cases they don’t even boot up – they’re just slabs sitting safely behind glass. Real tablets that you can actually try out are few and far between.”
Apple’s iPad “really shook things up” and had pretty much the same effect in the marketplace. Last year had been billed as ‘the year of the tablet’, but it ended up being the year of the iPad. Until 2009 only one million tablets had been sold. Apple sold 3.3 million units in the last three months of 2010 alone and now has 74% of the market. So why was it so successful and what does it mean for investors?
Apple’s cult following helped, while the success of the iPhone meant the firm was able to adapt its library of popular applications (‘apps’) to the iPad. It also had considerable technical merits, combining usability, a good screen and decent processing power. Yet its blockbuster sales even took optimists by surprise. We “assumed that sales would slow in a summer slump, as is common with consumer-technology purchases… But the iPad isn’t behaving like other consumer devices,” said American tech consultancy Forrester Research last year. They are “economical touchscreen machines that combine some of the basic functions of a smartphone, personal computer, and media player”, says Turner Investments. They also do a fairly good imitation of a book. Users of iPads have downloaded millions of books so far and together with e-readers have helped e-books outsell paper copies on Amazon.
The most surprising thing about the tablet is that it has been a success with businesses. JP Morgan found that more than 60% of the firms it surveyed were using tablet technology. Apple, which offers 500 business apps, claims that 80% of America’s Fortune 100 firms are using or testing the iPad. Relatively cheap (ie, less expensive than a laptop), tablets like the iPad have a range of uses. They help delivery firms save on paper, for example, or salespeople make better pitches.
The one person who probably wasn’t surprised by the iPad’s success is Bill Gates, founder of Apple rival Microsoft. Back in 2001 Gates predicted that the tablet would be “the most popular form of PC sold in America” within five years. His timing was off, but it wasn’t until the iPad that anyone came close to fulfilling the tablet’s potential.
The result will be a tablet boom unlike anything we have seen before, says JP Morgan. Tablets are a natural step in the “mobile computing cycle” and will be adopted faster “than any previous mobile device”. Indeed, the bank estimates that 441 million will be sold between 2010 and 2015. Given those statistics, it’s unsurprising that this year’s Computex will see around 50 different tablets on display. Some are low-cost Chinese-made models to be sold to buyers in emerging markets, while others will pose direct competition to the iPad.
Meanwhile, chipmaker Intel – which has been slow to produce the power-efficient chips needed for tablets – has finally developed a credible alternative to the iPad’s ARM chip. Below, we look at the best way to play the tablet boom.
The best bet in the sector
Tablets will provide difficult competition for some firms. Traditional PC makers will suffer, although much of the tablet threat is already in the price. Printing is another area to avoid. Firms such as Lexmark and Ricoh could take a hit as businesses and consumers replace magazines and documents with tablets. Apple (NASDAQ: AAPL) will continue to be a leader in tablet computers, especially with the release of iPad 2. However, the Apple story is well known and the company looks pricey on a p/e of 13.4. A cheaper way to play the tablet growth story is via Korean electronics giant Samsung Electronics (LI: SMSN).
We like Samsung because it makes the memory-based storage (NAND) used in tablets. As JP Morgan points out, NAND makers are “the most likely beneficiary” of the massive increase in tablets. However, Samsung is also a tablet vendor – its Galaxy Tab range has emerged as a serious iPad competitor. It runs Google’s Android operating system, so can offer customers a wide range of apps. Moreover, analysts expect smartphone-makers such as Samsung to have an inherent advantage in the tablet business. Digital media and semiconductors chip in almost 50% of the firm’s sales and the impact of tablets within both divisions will grow. On a p/e of 5.5, the firm looks cheap.