UBS Global Research analysts Steven Milunovich, Peter Christiansen and John Roy give Apple Inc. (NASDAQ:AAPL) a neutral rating. Below is an excerpt from their report on Apple Inc. (NASDAQ:AAPL)’s iPhone and iPad.

Apple

Apple’s iPad a success but not like the iPhone

We have been somewhat disappointed with iPad units, which are not on the same growth curve as the iPhone at a similar point since introduction. In F13 iPad units rose 13% to 71mn, and revenue increased just 3% due to a 15% decline in ASP. We do, however, expect the new products to bump Dec quarter shipments to 25mn, up 9% YoY. In addition, Apple Inc. (NASDAQ:AAPL)’s tablet share has fallen from 70% to under 30% despite dominating web usage on tablets. It’s not that Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), Google Inc (NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN) are gaining share head-to-head but that there is so much growth in $100-200 tablets in Asia.

Tablets a nice but not must-have

We have speculated that upside might be limited by the tablet being squeezed between smartphones and PCs. In addition, phablets may be cutting into sales, especially in Asia. Also, tablet upgrade cycles are longer. A Gartner Group survey sheds more light on the subject. Gartner finds that consumers consider tablets desirable but not mission-critical.

Entertainment is the primary tablet job

We think Apple Inc. (NASDAQ:AAPL) endorses Clay Christensen’s view that product designers need to think about the “job to be done.” According to Figures 1-2, the smartphone is best at keeping people in contact with friends and family. The PC’s differentiation is to do work with productivity apps. The tablet is particularly good at entertainment. In a sense, the tablet’s real job is to reduce boredom as the top response to how a tablet makes consumers feel is “Never bored—technology provides me with many entertainment options.” In fact, we think tablet sales are contributing to TV shipment weakness. The results also suggest the possibility of further market segmentation—content creation is the tablet’s Achilles heel. So far Apple Inc. (NASDAQ:AAPL) appears okay with that but an alternative is to develop a convertible product aimed at a different job to be done.

Valuation: Stock in a trading range

Our price target of $540 per share is based on an EV/FCF multiple of 7x.