Apple Must Show It's Not Fragile, Says UBS

Apple Inc. AAPL is valued like International Business Machines Corp. IBM, despite the former’s long-term growth and margin prospect being superior to that of IBM, UBS’s Steven Milunovich said in a report. He maintained a Buy rating on the company, with a $115 price target.

While Apple does face product cycle issues currently, its long-term growth and margins were superior. Milunovich mentioned, however, that investors felt reluctant to look past short-term issues, because “Apple is considered fragile.” Tech stocks thrive on change and are volatile, while fragile options dislike volatility and uncertainty.

Large technology companies tend to be “more fragile than they appear,” since the industry structure changes every 20 years, Milunovich noted. He added,” Past success tends to mean future distress – we think Apple must show it is not fragile.”

Related Link: Apple's Q3 Report: The Current Sell-Side Sentiment

Why Is Apple Fragile?

Apple’s fragility is mostly on account of the company’s dependence on the iPhone and China. The analyst commented that the three “existential threats” for Apple are:

1. Phones that were “good enough” to compete with the iPhone
2. Policies of the Chinese government
3. Chatbots making apps less important

Discussions with Horace Dediu, an analyst who focuses on smartphones and Apple, indicated that while variability was good for Alphabet Inc GOOGL and Facebook Inc FB, Apple “can’t play the experimental game because it cannot afford to fail,” Milunovich wrote.

How Can Apple Address Fragility?

“Diversification by product and geography as well as more annuity revenue would likely help,” the UBS report stated. Apple should focus on new product categories like Watch, VR and car, which would “emphasize the Apple customer experience over products, and possibly provide a blanket subscription,” the analyst added.

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