As Q4 Report Looms, Don't Forget Apple's Services And App Store Segments

Apple Inc. AAPL is scheduled to report its fourth-quarter earnings results after Tuesday's market close, and analysts at Macquarie Research will be paying close attention to the company's most underappreciated story: Services.

According to Macquarie's Ben Schachter, Apple's software and services businesses are the most underappreciated part of the company's story, especially the App Store. In fact, given the company's "relatively healthy" iPhone and hardware business, investors will begin focusing more and more on the performance of the services business.

Related Link: Apple Is Facing An "Off Year" In 2017

The analyst remains positive on Apple's services business for five key reasons, specifically:

1. Apps are expanding beyond just games for revenue.
2. Growth is being observed internationally, and China is now the largest market.
3. Services remain the second-most important driver after the iPhone.
4. Services also happen to be Apple's fastest growing and highest margin segment.
5. Revenue per user within apps is increasing.

Schacther is expecting Apple's management to highlight its services business and App Store growth to investors in the upcoming earnings report and conference call.

Finally, the analyst is modeling Apple's total services revenue to be $27.6 billion in fiscal 2017, which represents 11 percent of total revenue and contributes 25 percent of gross profit.

Bottom line, Apple's services revenue alone could rival those of a Fortune 100 company, as the segment's revenue is modeled to reach $105.7 billion by 2020.

Shares of Apple remain Outperform rated with a $132 price target.

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