After 2020, the share price is saying, Apple's profits fall off a cliff.
"Investors don't seem to have much faith in Apple's future," writes UBS analyst Steven Milunovich in a note to clients Wednesday.
"Our residual income model finds that only 11% of the market cap is attributable to profits beyond three years... The current price appears to reflect gradual erosion in the installed base and the roughly $350 in annual customer expenditure."
In other words, built into Apple's share price is the assumption that there's little or nothing beyond the iPhone. Once that story plays out, the growth years are over.
Not so, says Milunovich, who has a Buy on the stock and a $127 price target. You can't tell what Apple has up its sleeve for tomorrow, he suggests, by looking at what it's selling today. As Milunovich puts it, with a nod to Jobs and Gretzky: "Mac sales in 2001 or iPod units in 2007, didn't have much to say about where the puck was going."
Where Milunovich thinks the puck is going is to something he calls the Ambient Paradigm. (That's "ambient," for "present on all sides," not Ambien, the sedative.)
Ambience requires hardware, software, and orchestration. Although the iPhone remains important in new uses such as [augmented reality], we expect the Watch, AirPods, and possibly other wearables to evolve beyond current functionality and potentially impact hard-to-disrupt industries such as healthcare and education. Siri increasingly can play traffic cop, invoking services enabled by Apple opening up APIs, to provide a seamless user experience across devices whether the consumer is sitting, walking, shopping, or driving. We suggest that this trusted, connected ecosystem could be the next scarcity.
We'll see. Nobody knows how big the market for this stuff is. Or whether Apple can continue to sell products at the premiums to which investors have become accustomed.
But I don't think Milunovich's faith in the company is misplaced. It makes more sense to me than assuming Apple is doomed.