Why Apple stock might not trade 'like a steel mill going out of business' anymore

One of the most interesting aspects of Apple stock is that it trades at a much lower price-earnings ratio (PE) than nearly any of its main competitors.

If you're not familiar with it, the PE ratio is simply the market price of the stock divided by the last four quarters of income. The higher the PE ratio, the more expensive the stock.

While Apple currently manages a PE ratio of 11, Google parent Alphabet enjoys a PE ratio of 32, and even Microsoft clocks in at 38.

It's a trend that prompted venture capitalist Marc Andreessen to comment that Apple stock "trades like a steel mill on its way out of business."

But Wall Street might be changing its mind, according to a new note from analysts at UBS. Steven Milunovich writes that he believes that Apple is priced like a "mature hardware incumbent," whereas investors are really underestimating the "monetization potential of the platform."

(Milunovich is looking at forward PE, which uses future estimated income instead of last year's income.)

Platform companies are much more valuable than traditional sales companies, he argues. The premium given to platform companies partially explains why Alphabet and other tech firms trade at a higher PE ratio than Apple despite having significantly lower revenue and profit.

Although Apple has traditionally used its platform services like the App Store as a feature to sell hardware, this might be changing, Milunovich writes:

We view iOS as a two-sided platform in which Apple monetizes consumers through hardware and subsidizes the ecosystem with software and services (which is why we question services becoming an earnings driver). Despite being vertically integrated and proprietary in hardware, Apple has learned to open APIs and build a community in a horizontal platform.

The note lines up with something Apple CEO Tim Cook has been shouting for a while: Yes, Apple does services too. During the company's last earnings call, it distributed a document summarizing the total size of Apple's services business, remarking that by its services revenue itself - nearly $20 billion in 2015 - was larger than many of its competitors.

Apple is arguing that it can continue to squeeze more revenue out of its installed base of hundreds of millions of iPhones, beyond the sales price of the iPhone itself, and at least one analyst is listening.

Milunovich advises that Apple should trade at a PE ratio of 14.

"Our price target of $120 is based on 14x F16 estimated EPS or 12x our F17E as the stock's discount to the market narrows," he writes.