The bulk of Apple Inc. (NASDAQ:AAPL) revenue comes from hardware, so most conversations about its stock price rightly focus on iPhone and iPad sales or whether it can crack the wearable tech market. App revenues pale in comparison and they aren’t even broken out in Apple’s quarterly reports, but they are estimated to be the fastest growing revenue stream with margins approaching 100%.

“We calculate that app revenues rose by over 100% in FY13, and recent growth appears to be strong: Chinese revenues from apps were up 70% sequentially in Q1 14,” writes Societe Generale analyst Andy Perkins, who has upgraded Apple Inc. (NASDAQ:AAPL) from Hold to Buy because of the upside presented by app revenues. “Revenue from the Apps Store should be very profitable as marginal costs are essentially zero.”

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App Store exceeding expectations like text messaging once did

Perkins compares Apple Inc.’s (NASDAQ:AAPL) App Store, launched a year after the iPhone came out, to text messaging, which was originally just a way to monetize excess bandwidth but earned operators $67 billion in 2012. With the explosion of both available apps and total downloads, he thinks the App Store has similarly moved from being an afterthought to a major revenue stream.

To estimate just how much they are making, he points out that Apple Inc. (NASDAQ:AAPL) has a 70-30 split with developers. That exact figure isn’t reported either, but it is mentioned from time to time during earnings calls and conference presentations. Gathering all those comments together and apply the known ratio leads him to conclude that total sales reached $10 billion in 2013, doubling in a single year.

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Apple’s accounting choices have obscured app revenue growth

Apple Inc.’s (NASDAQ:AAPL) accounting methods may be partially responsible for why this strong growth has gone unnoticed so far. It appears that, instead of recording all App Store spending as revenue and the payments to developers as costs, Apple is simply recording its 30% net take as revenue with a 100% gross margin. This makes the contribution to revenues smaller than it could be, though it also means that App Store purchases are essentially pure profit. A misunderstanding about how the sales are being represented could cause people to underestimate the App Store’s potential.

The result is that Perkins has increased his operating forecasts by 10% and his price target from $82.14 to $105 (currently $92) pushing Apple Inc. (NASDAQ:AAPL) to a Buy.

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