Some people wonder why I’m such a strong supporter of Apple and their products. Beside the fact that Apple offers products with unparalleled quality, relative ease of use and outstanding customer service and support, there’s something else about their products you wouldn’t understand unless you were a user of all of their products. I know this because I own and use products from their entire product line daily, from the iMac to the iPhone to the Apple Watch & Apple TV. I have come to understand the many benefits of being well established within Apple’s ecosystem.

In spite of their current lineup of great products and awesome customer service, where does Apple go from here? Many analysts will tell you that Apple has peaked as a company and have lost their vision since Steve Jobs’ passing five years ago. Many naysayers will tell you the best years are behind them and that the world’s most profitable company has lost its mojo. Much of this speculation is due to Apple’s culture of secrecy, which holds their future product plans very close to the vest. However, as a daily user of Apple’s entire product offerings I know in my gut that they are far from done when it comes to innovation. I know there are really big things coming, regardless of whether or not an Apple car ever sees the light of day.

UBS technology analyst Steven Milunovich published a note this week that makes an excellent case for the continued leadership of Apple based on what he calls the “Ambient Paradigm,” the basis for his reiteration of his Buy rating on the stock. His vision for the direction the company is heading is both exciting and refreshing. His research was quoted in a Barron’s article, which I have reproduced below. Milunovich’s forward thinking makes so much sense to me based on my personal experience with their products, which are increasingly interoperable and play such a significant role in my daily routine. Stay tuned for years of exciting products and surprises coming from Apple.

From Barron’s – October 5, 2016, 11:40 A.M. ET
Apple Will Dominate ‘Ambiance,’ Says UBS

UBS’s Steve Milunovich today reiterates a Buy rating on shares of Apple (AAPL), reflecting on the fact that most of the market cap of the stock is existing profit, showing “investors don’t seem to have much faith in Apple’s future.”

Maybe if Apple has nothing but the iPhone, that worry is warranted, writes Milunovich.

But, “we believe Apple is preparing for the next era of personal technology—the Ambient Paradigm.”

Milunovich quotes late Apple co-founder and CEO Steve Jobs, who claimed in 2007, with the iPhone, the company was “skating to where the puck is going,” to remind people it’s hard to always know what the company is “evolving” into:

During the 2007 iPhone launch Jobs quoted Wayne Gretzky’s “I skate to where the puck is going to be, not where it has been.” This epitomizes the challenge of analyzing Apple—long-term forecasts for current product lines are of little value because the company moves on to the next product. Mac functionality is subsumed by the iPad, which sees some of its capability cascade down to the iPhone, which over time overlaps with the Watch. Only by understanding where Apple is going can we form a view of whether the company will be displaced.

Milunovich thinks people are taking a mostly “linear” view of Apple, with one product succeeding the last, thereby missing the point.

“A different angle reveals a deeper evolution—Apple’s products exist within definable eras or “paradigms” of technology.”

He offers the following infographic on that:

UBS Models Apple product evolution, October 5th, 2016.

That question-mark box is to be filled with the next paradigm, “the Ambient Paradigm,” he writes:

The transition products of today appear to be Apple Watch and AirPods, providing clues to the future. Both have niche-like functionality and reside on the outskirts of the Mobile Paradigm. Investors may need to look beyond the first-order purpose of the devices (health/notifications/earphones), just as focusing on iPod as a music player would have indicated little about the future. Apple often introduces important long- term technology in a more modest form that reveals only part of its eventual capability. For instance, Apple appears to have settled on the recent version of the Watch as a fitness play, but we expect health and Internet of Things interactions to become integral over time. The key attribute of today’s transition offerings is the potential for multiple products to sync together and collectively offer an integrated user experience (UX). This “collective functionality” and “integrated UX” points to a new era we call the Ambient Paradigm. The Ambient Paradigm consists of a many devices providing different input/output methods that can be flexibly utilized depending on the situation (sitting, walking, running, driving). Collectively these devices offer the capability of earlier products and more delivered as a seamless user experience. Devices become extensions of one another rather than discreet, computing platforms. It is an expression of what Tim Cook has described as “iOS everywhere.” Using AirPods plus the Watch, one could ask Siri for directions and rely on the Watch to see progress along the route. A pedestrian or driver could receive a notification via the Watch or listen to Siri through the AirPods. Although a primitive example, this shows the delivery of a user experience that is enveloping and natural. The technology is ambient. Each iteration of the Watch and AirPods will bring more compute power, battery life, and capabilities. Over time, Apple likely will add other wearables and capabilities, such as VR/AR. Eventually there will be an ecosystem of devices capable of collectively offering the one thing Apple really cares about—an unmatched user experience, the ultimate expression of Jobs’ vision of the synergy of the liberal arts and technology.

Milunovich thinks there are clues in things such as “continuity,” the software function in Mac OS and iOS that lead to hand-off of tasks, copying of clipboards between machines, etc.

In this regard, “The development of the W1 chip [in Apple’s wireless AirPods] is an underappreciated step on the hardware side.”

The chip’s purpose is to enable efficient connectivity, integral to ambient technology. Internal chip design has been a critical capability and a significant undertaking; we doubt Apple would make the investment unless the chip’s purpose is central to the future strategy. Bluetooth headphones and speakers have been common, but pairing can be difficult. We expect the W1 chip and a layer of software will improve on traditional Bluetooth similar to how iPod exceeded MP3 players and iPhone left BlackBerry behind. Early reviews of AirPods suggest a new level of pairing that works well across Apple devices.

Through all this, Milunovich thinks Apple is mastering the next “scarcity,” drawing on the writing of Alex Danco:

A potential scarcity is a lack of ambient delivery—continuous, always available services provided in the most convenient and unobtrusive way. Apple will work to abstract away this new scarcity by delivering devices and an ecosystem that enable apps to service our needs in a seamless manner. The new scarcity is the integrated devices/ecosystem within which these apps operate. By owning the devices and software that enable delivery of apps in this new paradigm, Apple may again own the new scarcity.

Milunovich thinks Apple will “monetize” ambiance with improvements upon AirPods and Apple Watch, including,

AirPods could play an important role as the origination and end-point for voice- related input/output. Apple will add more complex capabilities to the W1 chip. For example, AirPods could absorb contextual clues to determine whether a user is conversing with someone nearby and employ the noise cancellation feature (link). Likewise, the device’s sensors could determine the optimal way to collect and transmit voice data to avoid background noise (link). Health data, such as body temperature, could also be added.

The iPhone, at the center of it all, will become a “server” computer, which handles requests from the Apple Watch and other things, which could include augmented reality headsets and “an advanced home sensor system hinted in development.”

All that means, “We think the current price reflects little optionality for future product success.”

In fact, the current price appears to assume gradual erosion in Apple’s installed base and the amount each user spends per year. For example, our residual income model indicates that a full 78% of Apple’s valuation is captured by capitalizing today’s earnings with just 11% attributable to profits beyond three years.

Apple shares today are down 3 cents at $112.97.