Macquarie's Deep Dive Into Apple's Fastest Growing (And Underappreciated) Segment

Ben Schachter of Macquarie Capital commented in a report on Thursday that Apple Inc. (NASDAQ: AAPL)'s services sector isn't only the company's fastest growing segment, is its highest margin segment and a key profit growth driver.

According to Schachter, Apple's services sector is "underappreciated." Investors are now paying more attention to the segment, but that may be due to the fact that the company and management is "talking about services more than ever" and was highlighted as the second most important revenue driver during its most recent post earnings conference call.

Schachter said that despite heightened attention, there are still many misunderstandings regarding the segment, especially as it pertains to revenue recognition of gross versus net as well as margin concerns.

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As noted by the analyst, Apple recognizes revenue from the App Store on a net basis; since management's new disclosures, it's easier to estimate the full size of the business on a gross basis. On the margins side, by fiscal 2017, the contribution of services gross margin will be double its contribution from revenue.

Finally, Schachter's outlook on the segment remains unchanged from two years ago and services will represent 12 percent of Apple's total revenue in fiscal 2017 and 25 percent of gross profits. This will continuously grow to 16 percent of total revenue and 35 percent of gross profit by fiscal 2020.

Shares of Apple remain Outperform rated with an unchanged $115 price target.