Macquarie Kicks Off Apple Coverage With ‘Outperform’ Rating

Source: Thinkstock

Source: Thinkstock

Apple (NASDAQ:AAPL) received some additional analyst attention this week as Macquarie USA Equities Research initiated its coverage of the Cupertino-based company with an “Outperform” rating and a $630 price target, reports Barron’s. While most analysts that are bullish on Apple tend to focus on potential new products or new product categories, Macquarie analyst Ben Schachter instead focused his research note on the potential for increased earnings from Apple’s current line of products and services.

Schachter noted that Apple’s software, iTunes, and other services make up an “underappreciated business” that has the potential to become an important source of profits in the future. “[W]e believe that this underappreciated business will be a key profit growth driver,” wrote Schachter in a note to investors obtained by StreetInsider. “In 2012, this business accounted for just 8% of sales and ~12% of EBIT (est). We expect that by 2016 it will grow to 13% of sales and a very notable 30% of total EBIT. By 2020, it could drive almost 40% of Apple’s profits. In fact, on a gross revenue basis, AAPL’s iTunes/Software/Services business should generate ~$30b in 2014 sales.”

According to Schachter, the increasing importance of Apple’s “iTunes/Software/Services business” will correspond with a decline in the company’s hardware business. “Over the longer term, we believe that all three AAPL hardware categories will come under pricing and other competitive pressures,” wrote Schachter. “With limited insight into new features to drive these businesses, we are forecasting limited growth post the iPhone 6 upgrade cycle.”

According to StreetInsider, Schachter predicted that the upcoming iPhone 6 would drive 11 percent year-over-year growth in Apple’s iPhone sales. On the other hand, the Macquarie analyst expects iPad sales to remain flat or see only a slight increase over last year.

“The bottom line is that while Apple’s current hardware businesses face many challenges and new product introductions remain uncertain, its high-margin iTunes/Software/Services businesses will drive profit growth,” wrote Schachter. According to Barron’s, Schachter also cited Apple’s “substantial cash position, cash generating abilities, and new opportunities” as drivers of future growth.

As noted by Business Insider, Schachter highlighted six categories of Apple’s businesses that he believes the iPhone maker could develop further, including automobiles, television, wearable technology, mobile payments, home automation, and exclusive media content. Schachter believes that CarPlay, Apple’s in-vehicle device integration system, could eventually become a key part of Apple’s ecosystem.

Although Schachter has not ruled out the possibility of an Apple television set, he thinks it is more likely that Apple will release an updated Apple TV product with new content and game support. Earlier this year, the Wall Street Journal reported that Apple was developing a mobile payments service, and Schachter also believes Apple will unveil such a service this year. Overall, Schachter predicted that Apple will unveil more “products focusing on energy, healthcare/fitness, security/monitoring, entertainment, etc,” reports Business Insider.

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