Apple Inc. (AAPL): As Always, Innovation Will Drive Stock Price

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UBS analysts Steven Milunovich and Peter Christiansen mull over Jony Ive’s comments about Apple Inc. (NASDAQ:AAPL), innovation, and the road ahead.

Apple’s stock depends on innovation

Jony Ive: The Genius Behind Apple Inc. (NASDAQ:AAPL)’s Greatest Products by Leander Kahney provides insights into the design workings of Apple. Although the book is a look-back, there are lessons that may affect Apple’s future. The good news is that we came away believing Apple has the talent and processes to successfully innovate. It’s also clear, however, how difficult it is to do so. One Apple Inc. (NASDAQ:AAPL) exec said about the iPhone development: “Everything was a struggle. Every. Single. Thing was a struggle…” We think the stock largely depends on new product categories, which we expect to result in appreciation.

Jony is irreplaceable

The book emphasizes how close Ive and Jobs were and how Jobs wanted Ive to have product control in the future. Clive Grinyer, Jony’s first business partner, said “Believe it or not, Jony’s leaving would be worse for Apple Inc. (NASDAQ:AAPL) than Jobs’ leaving. Jony is irreplaceable.” While opinions of iOS 7 are mixed, handing Ive both hardware and software control probably is a positive given that integration is key to Apple’s differentiation. Ive was not a fan of Scott Forstall’s skeuomorphic approach. Ive and Tony Fadell also bumped heads, which might have contributed to Apple Inc. (NASDAQ:AAPL)’s lack of interest in acquiring Fadell’s Nest recently.

Still new

Jony heads the Industrial Design (ID) group, which “rules Apple,” according to some observers. It appears ID is a close-knit group of about 15 designers, many of whom have worked together for 15-20 years. At early design stages ID focuses on the feel of a device—”often we’ll talk about the story for the product.” For example, the iPhone was all about the screen, comparing it to an infinity pool. In a recent interview Ive said, “We are at the beginning of a remarkable time, when a number of products will be developed…we’re not even close to any kind of limit. It’s still so, so new.”

Valuation: Maintain Buy

Our price target of $625 per share is based on a NTM EV/FCF multiple of 9.5x, in-line with other large cap tech names. We like Apple Inc. (NASDAQ:AAPL)’s “better before cheaper” approach.

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