iOS Everywhere: Apple's Future Evolution May Lie In Almost Everything Except The iPhone

Investors don't have much confidence in Apple Inc.'s AAPL future, at least according to UBS' Steven Milunovich.

In a report published Wednesday, Milunovich stated that "little optionality" is priced into Apple's stock. Specifically, his residual income model found that only 11 percent of Apple's market cap is attributable to profits beyond three years. In addition, Apple's current market cap implies "slight annual declines" in the size of the installed base and how much customers spent on Apple's product.

"If there is little beyond the iPhone, this cautious view should prove correct," the analyst wrote. "However, we believe Apple is preparing for the next era of personal technology - the Ambient Paradigm."

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Milunovich said ambience requires hardware, software and orchestration. As such, the analyst expects Apple Watch, AirPods and possibly other future wearables to evolve beyond current functionality and impact industries such as healthcare and education. In addition, Siri could also "play traffic cop," invoking services enabled by Apple opening up APIs and provide a "seamless user experience" across devices regardless if the consumer is sitting, walking, shopping or driving.

The analyst believes this "trusted, connected ecosystem could be the next scarcity."

Bottom line, Milunovich stated that Apple's future is difficult to predict and investors should think of Apple's evolution in paradigms. For instance, the "Computer Paradigm" (Mac) yielded to the Mobile Paradigm and the Apple Watch and AirPods can be viewed similarly.

"We call it the the Ambient (present on all sides) Paradigm," the analyst further stated. "It is Tim Cook's 'iOS everywhere.'"