Apple's (AAPL) iTunes/Software Will Make up for Hardware Challenges; Macquarie Starts at 'Outperform'

Macquarie starts Apple (Nasdaq: AAPL) at Outperform and price target of $630.

Analyst Ben Schachter is looking for over 11 percent year-over-year growth of iPhone sales (up 7 percent in Apple's fiscal year) due to the new iPhone 6 product cycle. iPad sales are expected to be flat to slightly up from last year.

Schacter sees iTunes and Software and Service becoming a bigger part of Apple's story. He comments, we believe that this underappreciated business will be a key profit growth driver. 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.

Apple's iPad and Mac are also expected to face greater challenges moving forward. Schacter said, Over the longer term, we believe that all three AAPL hardware categories will come under pricing and other competitive pressures. With limited insight into new features to drive these businesses, we are forecasting limited growth post the iPhone 6 upgrade cycle.

Bottom line: 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.

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