UBS is upgrading Apple (NASDAQ:AAPL) to Buy from Neutral from a $265 price target (prev. $170):

Firm notes their positive view is predicated upon expectations for greater "recurring" iPhone hardware revenue (due to a growing installed base & stickiness of the App Store) which should drive more visibility into iPhone sales (20%+ of our FY10 iPhone shipments), as well as continued iPhone expansion driven by new partnerships (end of exclusivities). They also believe upward revisions to consensus ests are likely given underestimated gross margin potential.

Apple service could be the next long term driver

UBS believes AAPL may be working on building out a foundation for a service to provide seamless access & mobility of digital content across all its products. They envision a service that seamlessly allows access to media-focused content of iTunes & user-generated content of MobileMe (pictures/videos/email/calendar) as well as social networking integration from any existing Apple product. Firm believes the service may be the draw (halo) that drive additional future Apple product sales.



Capex hints at build of a potential enhanced service, which UBS thinks could help drive further hardware sales. Capex related to infrastructure & corporate facilities has been ramping, reaching $702 million in FY08 and rising to an estimated $840 million in FY09 from $128 million in FY05. They believe a material portion of this capex may be related to the build out of a data center/network operating center (NOC) which they hypothesize will be the foundation for a service that provides seamless access and mobility of digital content across all its products, at any time, and from any place. Similar to Research In Motion's, the NOC may also help to reduce network congestion through techniques such as compression & push. UBS envisions a service that will seamlessly allow access to the media-focused content of iTunes (music/video) and user-generated content of MobileMe (pictures/videos/email/calendar) as well as integration with social networking sites from any existing Apple product. They believe the service, in the future, may be the draw to purchase additional Apple products.

New products still on the way

From a new product perspective, one thing is certain, in UBS' opinion – Apple will continue to introduce new products across its product portfolio every year.