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With Apple’s (NASDAQ:AAPL) stock seeing its deepest drops in several months, the company is choosing to keep its sights focused on product development rather than worry about financials, according to UBS analyst Steve Milunovich.
Milunovich said that his recent meeting with the company’s management, including chief executive Tim Cook, had led him to believe that Apple was set on creating new categories of products and services as well as providing more support for enterprise customers. It was also not looking to make direct investments in content, own communications networks, or get involved in direct component manufacturing.
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“The company suggested it does believe there are more frontiers to conquer, more new categories to create while underscoring continued opportunity in smartphones and tablets,” the analyst wrote in a research note, according to Barron’s. “Of course, we don’t know what these might be. Wearable computing? Entertainment management? Observer Horace Dediu said on our conference call that, ‘The remote control is very crude. If they can solve the problem and move to either a touch or gesture recognition, then they can create an app universe on the TV.’”
Enterprise was another area of huge interest to Apple, Milunovich wrote. “Despite Steve Jobs’ lack of interest in selling to corporations, Apple recognizes the BYOD trend,” he wrote, referring to the new Bring-Your-Own-Device culture. “The company has over 200 enterprise sales people in the U.S., is expanding its VAR [value-added reseller] channel, and supports companies out of the retail stores.”
The analyst credited the late Apple co-founder for the company’s forward-looking strategy: “Despite the recent management changes, Apple remains product- rather than financial-focused, perhaps Steve Jobs’ most important legacy.”
He added that the company’s management was bullish on its “growth opportunities and ability to differentiate.”
Milunovich, who reiterated his Buy rating and a $780 price target for Apple stock, added that despite projections that gross margin would dip to 36 percent this quarter, the company was likely to get back to the “low 40s” as costs eventually dropped.
“The big question on investors’ minds following the quarter is margins,” the analyst wrote. “Apple is typically conservative. We look for a December quarter gross margin of 38.3 percent vs the 36 percent guidance. Then we think the margin could move into the low-40s as products come down the cost curve and the iPhone contribution to revenue stays above 50 percent, offsetting lower sequential sales.
The analyst called that possibility a “near-term upside surprise” and noted that the company was on a pattern of two big quarters and two weaker quarters with product announcements weighted toward fall.
He said the firm’s December quarter revenue estimate for Apple was $53.5 billion, above the company’s own $52 billion guidance. “With earnings momentum bottoming and near-term upside EPS surprises more likely, we continue to like the stock here,” the analyst concluded.
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