Don't Want To Be Valued Like IBM? Apple (AAPL) Needs To Get Less Fragile - UBS

UBS analyst, Steve Milunovich, reiterated his Buy rating on Apple (NASDAQ: AAPL) and offered some advice for multiple expansion: Be less fragile. Based on Nassim Taleb's concept of fragility, fragile things hate volatility and uncertainty while the antifragile thrives on change.

Apple's fragility is mostly due to its dependence on iPhone and China. They have highlighted three existential threats: "good enough" competitor phones, Chinese government policies that present additional challenges to Apple in that market, and chatbots making apps less important.

For instance, per media reports, iBooks and iTunes Movies were shut down at the behest of a Chinese regulator six months after they opened.

However, another aspect of fragility is more nuanced. Taleb argues that "rationality is avoidance of systematic ruin." Many small risks should be taken, but chance of ruin must be avoided. In the firm's discussion with Horace Dediu, he pointed out that unlike Google and Facebook, Apple can't play the experimental game because it cannot afford to fail. A luxury brand can never deliver a bad experience.

What can help the company be less fragile? "The ecosystem created by being a multi-sided platform is a big help as it keeps customers in the fold—the current debate is about when, not if, consumers will upgrade. Opening up Siri and Messages to developers was smart. Diversification by product and geography as well as more annuity revenue would likely help. Services are good but still tied to hardware. Apple needs new product categories such as Watch, VR, and car to be meaningful, emphasize the Apple customer experience over products, and possibly provide a blanket subscription."

No change to the Buy rating or price target of $115.00.

Apple report results after the bell today.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $97.34 yesterday.

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