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The market is not ready to embrace Apple's fastest growing business, analyst says

  • Apple services made $7 billion in revenue during the latest quarter
  • But Timothy Arcuri of Cowen and Company says services are not big enough to value separately

Apple's services business is on track to become the size of a Fortune 100 company — but it's not yet big enough to truly catch the eye of Wall Street, one analyst told CNBC's "Power Lunch" on Wednesday.

"I think people are not really looking at the services business — they're not really ready," said Timothy Arcuri, managing director at Cowen and Company.

Apple reported mixed earnings on Tuesday night, as earnings beat expectations but revenue fell short as iPhone sales fell from a year ago. But the company's services business, which includes the App Store, digital content, AppleCare, Apple Pay, and licensing, grew revenue 18 percent year over year, remaining the fastest growing segment at Apple.

Despite netting more than $7 billion in revenue during the quarter, the services business "is not really big enough yet to really do a true sum-of-the-parts [analysis]," Arcuri said.

"I think probably a year from now, maybe even two years from now, people will be much more willing to value the services business on its own," Arcuri said.

Because of this, Arcuri said the stock is "significantly undervalued." The stock was just slightly off of its all-time highs on Wednesday.

"I think that everyone wants to hear about services," Arcuri said. "Services was great. They were very confident that they were going to grow services, basically almost double by 2020. I think that's great."

Arcuri wrote in a note on Wednesday that the quarter turned out "fine," but that the next iPhone might face a 4-week to 6-week delay due to issues with the fingerprint readers.

Still, Arcuri said, the next iPhone could feature perks like wireless charging, and is "going to look different than any phone you've seen out of Apple."

"I think it's going to be huge," Arcuri said. "But I think there are questions of, 'What happens after that?'"

Right now, Apple's earnings have been boosted by increasing prices of iPhones. While this quarter's shipments fell slightly from a year ago, the average selling price of an iPhone during the quarter was $655, compared to $642 a year ago.

Hiking the prices of iPhones might become more difficult as Apple tries to penetrate markets like India, Arcuri said, where average per capita incomes are much lower than in the U.S.

"The question I would ask him really is about hardware pricing power," Arcuri said. "Because if you look at the last five years, everybody would agree that the entire smartphone market is slowing down. Yet, Apple's iPhone prices have gone up. If you look at the mix right now, the mix is actually skewing a lot more toward this bigger phone that has a higher price."

For more on Apple, watch CEO Tim Cook's interview on "Mad Money" on Wednesday at 6 p.m. ET.

Watch: Does Apple still have room to run?