Apple is About to Make a Bunch of iPads Obsolete, and It Could Benefit Shareholders

The iPad just isn't selling like it used to.

Once, Apple's (NASDAQ:AAPL) tablet was its second-largest business. But it's fallen on hard times in recent months. Last quarter, it generated less than 10% of Apple's total revenue, and was its second-smallest segment. Apple's management remains steadfast in its commitment to the iPad, consistently pointing to popular metrics of user engagement, consumers love their iPads, and continue to use them often.

They just aren't buying new ones.

To spark an upgrade cycle, Apple has worked to add attractive new features to the iPad, including the ability to multitask, and support for new accessories, notably the Apple Pencil. But the biggest incentive may come later this year: almost half of all iPads currently in use will not be able to take advantage of Apple's forthcoming software update, iOS 10, which could spark a major upgrade cycle.

There's a lot of ancient iPads still in use

Analytics firm Localytics has been tracking the iPad install base for some time. Back in March, the company published a chart detailing the current iPad install base. While it's possible to draw many inferences from Localytics' data, one thing is abundantly clear: Consumers are still using a lot of really old iPads.

Although the situation may have changed slightly in the last three months, Localytics found that the second-most commonly used iPad was the iPad 2, a device first released about 5 years ago. In total, the iPad 2 represented about 17% of the iPad install base. Other commonly used yet relatively old iPads include the original iPad Mini (15% of the install base) and the third-generation iPad (9%). Both were released roughly four years ago.

App compatibility could drive many to upgrade

To date, Apple has released 12 different iPad models, of which 8 will be compatible with iOS 10. The original iPad, the iPad 2, the iPad Mini, and the third-generation iPad are not compatible. If Localytics' findings are accurate, those four models represent a massive 42% of all the iPads currently in use. That means almost half of all iPad owners could be prompted to purchase new models sometime in the near future.

iOS 10 brings a number of useful new features to the iPad that owners of older models will miss out on, including improvements to notifications, the lock screen, and upgrades to Siri and Apple's virtual keyboard. But the bigger pull could be app compatibility.

App creators are free to support older versions of iOS, and most of them do, but many of the most popular apps in use today require a somewhat recent version of iOS to function.Pokemon Go, for example, only works on devices running iOS 8 or iOS 9. It may take a year or two, but eventually there will be many popular apps that require iOS 10. At that point, consumers looking to use these apps will be forced to upgrade.

A resurgent iPad could provide a nice tailwind

In 2011, 2012, and 2013, the iPad was a key driver of Apple's financials, generating a significant percentage of its revenue and fueling the company's future prospects. But both statements are increasingly untrue. iPad shipments have declined in each of the last nine consecutive quarters. In that time, Apple's stock has fluctuated significantly in both directions, but the iPad was rarely responsible. Instead, Apple investors have turned their attention more to new products like Apple Watch and Apple Music, as well as Apple's capital return program, and of course the iPhone.

Investors may be overlooking the iPad. A strengthening tablet business could help Apple surprise to the upside in the quarters ahead. If there's ever going to be an iPad upgrade cycle, now is the time.

Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.