Apple Inc. (AAPL) stock surged to an intraday high of $237.49, continuing its upward trajectory in 2024 and reaffirming the tech giant’s dominant position in the global market. However, even as Apple celebrates this financial milestone, analysts are sounding alarms over a looming regulatory threat that could significantly impact the company’s earnings, particularly its lucrative deal with Alphabet’s Google (GOOGL).
Apple’s relationship with Google has come under increasing scrutiny as U.S. regulators intensify their antitrust investigations into the search engine giant. The U.S. Department of Justice (DOJ) is zeroing in on Google’s multi-billion-dollar agreement with Apple, which makes Google the default search engine on Apple’s popular devices, including the iPhone and iPad.
For years, the Google-Apple partnership has been a significant source of revenue for Apple. According to a recent report by Bernstein, Google pays Apple between $18 billion and $20 billion annually in exchange for having Google Search as the default option on Apple devices. This arrangement accounts for approximately 14% to 16% of Apple’s operating profits, making it one of the most profitable deals for the company’s Services segment.
Apple’s Services division, which includes revenue from the App Store, iCloud, Apple Music, and other digital services, has become increasingly critical to the company’s growth as hardware sales plateau. The segment reported record revenues of $24.2 billion in the fiscal third quarter, making up a large portion of Apple’s overall earnings.
However, the DOJ’s ongoing antitrust case against Google threatens to disrupt this symbiotic relationship. Regulators argue that by pre-installing Google as the default search engine on Apple devices, competition is unfairly limited, stifling the growth of rival search engines such as Microsoft’s Bing and DuckDuckGo. A win for the DOJ could force Google to terminate its exclusive search deal with Apple, stripping Apple of a substantial revenue stream.
Investment firms and analysts are closely monitoring the antitrust case, speculating on the potential fallout for both Apple and Google. Bernstein analysts recently suggested there is a real possibility that federal courts could rule against Google, forcing the company to end its lucrative deal with Apple. Such an outcome would have significant financial implications for Apple’s bottom line.
Jefferies, a major investment firm, issued a warning about the potential risks of a DOJ victory. In a note to investors, Jefferies analyst Edison Lee stated that if Apple were to lose a third of the revenue it currently earns from Google due to antitrust restrictions, the company’s Discounted Cash Flow (DCF) could drop by approximately 8%, which translates to a potential loss of $19 per share.
“We estimate that if Apple loses a third of Google revenue (U.S. only) by FY28, our DCF would be about 8% lower,” Lee explained. He also noted that while the immediate revenue impact would primarily affect Apple’s earnings in the U.S., the ripple effects of a DOJ victory could extend internationally. If U.S. courts rule against Google, it may inspire regulators in other countries to consider similar actions, potentially jeopardizing Apple’s services revenue globally.
Given the global reach of both Apple and Google, any regulatory intervention in the U.S. could set a precedent for other countries to follow. With Apple’s Services revenue already under intense scrutiny by governments and regulators worldwide, a U.S. ruling against Google could prompt additional antitrust investigations into Apple’s other key markets.
As of now, Apple’s Services segment is one of the fastest-growing parts of the business. In fiscal Q3 2024, Services generated $24.2 billion, driven by increased demand for digital products like cloud storage, subscription services, and mobile payments. Should Apple lose the Google deal, it would need to identify alternative revenue sources to maintain this growth trajectory and offset potential declines in operating profits.
Despite the regulatory overhang, some analysts remain optimistic about Apple’s near-term outlook, particularly with the anticipated launch of the iPhone 16 and Apple Intelligence, its next-generation AI platform. However, they caution that any regulatory ruling against Google could weigh heavily on Apple’s earnings in the coming years.
While the focus remains on the DOJ’s antitrust case and its potential financial repercussions, Apple’s core hardware business continues to be its largest revenue driver, with the iPhone alone accounting for nearly half of the company’s total sales. In the fiscal third quarter ending on June 29, 2024, Apple reported iPhone sales of $39.3 billion, which represented a slight 1% year-over-year decline but exceeded Wall Street’s forecast of $38.81 billion.
The iPhone remains crucial to Apple’s business model, and analysts are keeping a close eye on demand trends for the upcoming iPhone 16 model. UBS, a prominent financial services firm, projects limited upside for iPhone sales in the remaining quarters of 2024, citing modest demand for the new models.
According to UBS’s tracking of iPhone availability across 30 regions, wait times for the iPhone 16 Pro have decreased compared to last year’s model. In the U.S., the wait time has shortened from 20 days to 18 days, and in China, it dropped from 21 days to 17 days. This suggests that demand, while still robust, may not be as high as initially anticipated.
UBS forecasts iPhone unit growth of 4% in the September quarter and only 1% in the December quarter. Despite these modest growth projections, UBS maintains a neutral rating on Apple stock with a price target of $236, close to the stock’s current trading price. As of October 15, Apple shares were up 20.39% year-to-date, reflecting strong investor confidence despite the challenges ahead.
Looking forward, Apple is expected to report its fiscal fourth-quarter earnings on October 31, 2024. The consensus forecast from Zacks Investment Research is for Apple to post earnings per share (EPS) of $1.54, an increase from the $1.46 reported in the same quarter last year. Apple has consistently beaten Wall Street’s expectations, and analysts will be watching closely to see how the company performs in Q4.
The upcoming earnings report will also offer insights into how Apple’s Services and hardware segments are faring in the face of regulatory headwinds and competitive pressures. Any updates on the DOJ case against Google and its potential impact on Apple’s finances will also be of keen interest to investors.
In addition to its hardware and services, Apple is set to launch its new artificial intelligence (AI) platform, Apple Intelligence, later this month. The platform is expected to be integrated across Apple’s ecosystem, enhancing the capabilities of devices like the iPhone, iPad, and MacBook with advanced AI-driven features.
Apple has been investing heavily in AI technology, seeking to catch up with rivals like Google and Microsoft, who have both made significant strides in the AI space. Apple Intelligence is expected to boost user engagement with Apple devices, particularly through improved personalization, predictive algorithms, and enhanced voice commands via Siri.
The rollout of Apple Intelligence could provide a much-needed boost to Apple’s Services revenue, potentially offsetting some of the risks posed by a DOJ ruling against the company’s search deal with Google. However, the long-term success of Apple Intelligence remains to be seen, especially as competition in the AI space heats up.
As Apple’s stock reaches new heights, the company finds itself navigating a complex landscape filled with both opportunities and challenges. The regulatory scrutiny over its partnership with Google looms large, with the DOJ’s antitrust case potentially threatening a critical source of revenue for the tech giant. Analysts warn that the loss of this deal could shave billions off Apple’s future earnings, especially if international regulators follow the DOJ’s lead.
Apple continues to innovate, with the upcoming launch of Apple Intelligence and strong demand for its iPhone 16 series expected to drive future growth. However, with modest projections for iPhone sales and uncertainty surrounding the Google deal, Apple’s financial outlook remains mixed.
As the company prepares to report its fiscal fourth-quarter earnings on October 31, investors will be keenly watching for any signs of how Apple plans to mitigate the potential impact of regulatory actions and continue its path toward sustained growth.
