QCM: Apple should segregate Software & Services revenue from its hardware business

Well, this won't happen, but Quarz Capital Management (QCM), an investment manager firm, has issued a letter urging Apple to “positively reshape the investment community's perception of the company by clearly segregating” the operating results of their rapidly growing and high margin Software & Services segment from the rest of their hardware business. This segment includes app stores, Apple Music, iTunes, and Apple Pay.

Through this increased transparency, QCM says its believes that investors will better appreciate and value the tremendous growth dynamics and rich margins of this segment, driven by Apple's growing, huge and captive installed base, addition of new product platforms and expansion into powerful new service categories. The investment manager firm argues that the potential increase in value of the share price resulting from such a financial segregation and reorganization has already been evident in other tech companies' moves such as Google (Alphabet), Amazon (AWS) and Microsoft (new reporting segments).

QCM says that the financial reorganization will allow this segment to be valued in line with peers, unlocking the persistent undervaluation that Apple currently trades at. The investment management firm believes that Apple can achieve a share price in excess of $200 per share by pursuing this move in combination with the capital return program and various growth catalysts.

QCM forecasts Apple revenue growth of 7.8 percent, resulting in a total revenue of $230 billion in fiscal year 2016. The revenue growth rate of individual product lines — namely the iPhone, iPad, Mac and “Other Products” are projected to be 5.9 percent, 6.0 percent, 5.8 percent, and 46.1 percent, respectively, with the growth in the Other Product category driven by the full year consolidation of Apple Watch sales and the launch of Apple TV. 

After modest growth of 10.2 percent in fiscal year 2015, QCM is forecasting strong Apple Software and Services revenue growth of 36 percent to $27 billion in fiscal year 2016. The investment manager firm expects net income growth to trend higher at 38.9 percent.