It seems Apple (AAPL) is coming under intense pressure from the runaway success of  Amazon's (AMZN) Kindle Fire tablet. Recently, Amazon announced that it is selling over 1 million Kindles (including Kindle eReaders) each week, which is on par with the 11 million iPads sold by Apple during the entire last quarter.

According to DigiTimes, Apple could come up with a 7.85-inch iPad next year in order to overcome the challenge posed by the 7-inch Kindle Fire tablets, even as other competitors such as Research in Motion (RIMM) and Motorola Mobility (MMI) continue to struggle in the tablet market.

Apple's Steve Jobs famously once proclaimed that competitors' 7-inch tablets are "Dead on Arrival," saying that tablets should have a 10-inch screen at a minimum for an optimum user interface experience (see Do 7-Inch Tablets Stand a Chance?). This theory stemmed partly from the perception that the 7-incher is a tweener -- too big to be a smartphone and too small to be an effective tablet. If Apple indeed comes up with a 7- to 8-inch tablet, it will be a significant design change from the current 10-inch screen of the iPad.

Speculation around the specifications of upcoming iPads has picked up in the last few weeks with various sources claiming that Apple could come up with a revamped iPad 3 and a cheaper iPad mini next year. (See  New iPads Could be the Next Trigger for Apple Stock)

We believe that the iPad 3 will be a high performance iPad with some attractive features such as voice recognition service Siri, presently a key feature of iPhone 4S. The new iPad might also have a high resolution screen. On the other hand, Apple could launch a cheaper version of the iPad with fewer features without reducing the screen size dramatically.

Our $500 price estimate for Apple stock is about 30% above market price.

See our complete analysis for Apple stock here.