UBS: Apple Still Undervalued As A Platform, Services Revenue Share Can Double By 2020

UBS’ Steven Milunovich believes that Apple Inc. AAPL is undervalued as a platform, given that “the stock trades at a valuation similar to legacy pipeline computer companies.”

Milunovich maintained a Buy rating on the company, with a price target of $120.

Two Platforms

Milunovich mentioned that Apple had two types of platforms. “iOS is an innovation platform, in which software and services support highmargin device sales,” the analyst said.

Apple also has several transaction platforms, including the App Store, Apple Pay and Apple Music. These platform help “monetize services more directly.”

Miilunovich believes that the innovation platform is the most important for the company, given that if Apple fails to sell hardware, it will not generate services revenue.

The role of services for the company was to create an ecosystem that makes devices more attractive.

Services In 2020

Milunovich also believes that services could contribute 20 percent of the profit in 2020, although it would still remain tied to hardware.

“We estimate that Services could increase from 10 percent of revenue and 13 percent of gross profit today to 12 percent of revenue and 20 percent of profit in 2020 as mix shifts to higher-margin offerings,” the UBS report said.

Milunovich believes that during periods when iPhone is weak, services could drive as much as 30 percent revenue growth, as well as significant profit contribution.