UBS looks at Apple Inc. (NASDAQ:AAPL) and comes to the conclusion that the company isn’t ripe for growth, but several factors combine to make it a good stock all the same.

Apple Stock

Is Apple a growth company? No, but stock still has potential to do well

The takeaway from recent earnings was the maturing of Apple Inc. (NASDAQ:AAPL)’s current product portfolio. iPhone revenue growth has decelerated from 83% in F2011 to 71% in F12, 16% in F13, and an estimated 6% in F14. iPad revenue rose just 3% in F13 and unit sell-through was 5% vs. the reported sell-in of 14% in F1Q. However, we expect iPhone unit increases to average about 10% in F2H as upgrade activity improves and emerging market activity, including 10mn phones through China Mobile, is strong. New products and increased capital return are other potential catalysts.

Large-screen phones an important addition

The iPad has done well with $32bn in sales last year, but the high-end tablet market has matured faster than did the smartphone. Phablets are cutting into tablet growth, not only in Asia but in Western countries. A survey of US buyers found that 40% of those planning to purchase a smartphone said they would buy a 5″ screen or larger. In addition, half of phablet users claimed they use their tablet less frequently since acquiring the phablet. We expect coming larger-screen phones should prove popular.

Apple’s ability to imagine new categories is critical

Although the impact of new products is mitigated by the size of the iPhone, additional categories will be key growth. Our view is that it is premature to despair of lack of innovation and that new products are the most important stock catalyst. Perhaps the characteristic that most differentiates Apple Inc. (NASDAQ:AAPL) has been imagination. Technologist John Seely Brown says, “I can be creative in solving today’s problems, but if I can’t imagine something new, then I’m stuck in the current situation.”

Valuation: In particular use weakness to establish or add to positions

We have tweaked our estimates down a bit, but maintain our $625 price target. We view Apple Inc. (NASDAQ:AAPL) as a trading stock, which means investors usually should buy particularly on weakness. We see good valuation and technical support at $485. Our price target of $625 per share is based on a NTM EV/FCF multiple of 9.5x, more in line with other large cap tech names.