Apple (AAPL) is likely to be adversely affected following a landmark ruling against Google (GOOGL), compounding a rough few days for the stock after it was recently revealed that Warren Buffett’s Berkshire Hathaway ($BRK.B) sold about half of its position in the stock. The antitrust verdict presents a downside risk to the stock that trades at significant multiples. Personally, I’m neutral on iPhone maker Apple.
Apple & Google’s Antitrust Ruling
On Monday, August 5, a court in Washington, D.C., delivered a landmark verdict against search engine giant Google, ruling that the mega-cap company unlawfully maintains its dominance in the online search market. District Judge Amit Mehta’s decision came after an extensive trial that highlighted Google’s monopolistic practices and how this had negatively impacted competition and innovation within the sector.
The antitrust ruling against Google has significant implications for its long-standing partnership with Apple. Mehta ruled that Google violated antitrust laws by maintaining a monopoly illegally in the search engine market through exclusive agreements with companies like Apple. The judge added that Apple had become a key beneficiary of these arrangements.
These agreements, which included substantial payments and revenue sharing to ensure Google remained the default search engine on Apple devices, were deemed to unfairly stifle competition. Google and Apple first collaborated on an early form of this agreement in 2002.
In 2022 alone, Google paid Apple approximately $20 billion for this privilege. According to Morgan Stanley (MS), this payment represents about 36% of Google’s search ad revenue through Safari. The current contract between Apple and Google is set to run through to September 2026.
An End to Apple’s Cash Cow?
The next phase of the case will look to find a remedy for Google’s legal overreach. The ruling could force Apple to reconsider its reliance on Google, potentially leading to less favorable revenue-sharing agreements with other search engines like Microsoft’s (MSFT) Bing. Likewise, Apple may be forced to allow users to select their search engine.
Analysts have suggested that such alternatives would offer lower economic benefits due to Google’s superior advertising monetization capabilities. Apple also faces the possibility of being barred from selling search defaults altogether. This more serious outcome would significantly impact its revenue from search advertising.
An internal study from 2018 cited in the ruling indicated that even if Apple made its own search engine and maintained 80% of search queries, it would still lose $12 billion in revenue over five years after separating from Google.
An email from John Giannandrea, an Apple employee who previously worked for Google, was cited during the trial by Mehta as saying, “There is considerable risk that [Apple] could end up with an unprofitable search engine that [is] also not better for users.” Analysts have also suggested that if the Google agreement is nullified, Apple could see its earnings fall by 4-6%.
It goes without saying that a $20 billion reduction in revenue or a 4-6% drop in earnings would hurt Apple stock. Not only is it a lot of money, but it’s also the best type of earnings — passive. This loss would also compound over time, reducing Apple’s capacity to invest in new projects, including artificial intelligence (AI) opportunities.
Pivot to AI?
While models have suggested it may be unprofitable, the ruling may open the door for Apple to develop its own search engine, a move it has contemplated but not pursued due to the potential risks and costs involved.
It could also accelerate Apple’s shift toward AI-powered search services, such as integrating OpenAI’s ChatGPT into its devices and revamping Siri with ever-advancing AI capabilities. While these initiatives may offer long-term benefits, they are not expected to generate substantial revenue in the near term.
AAPL: One of the Most Expensive Magnificent Seven Stocks
Apple stock trades at 30.93x forward earnings and has a price-to-earnings-to-growth (PEG) ratio of 3.63x, making it one of the most expensive Magnificent Seven stocks.
There are some mixed opinions on Apple. The market has clearly bought into Apple Intelligence and the upcoming iPhone 16 launch, but some analysts think it’s overplayed. The PEG ratio certainly suggested it’s overbought (a PEG ratio of 1.0x or lower is generally considered to be undervalued).
Is Apple Stock a Buy, According to Analysts?
On TipRanks, AAPL comes in as a Moderate Buy based on 24 Buys, seven Holds, and one Sell rating assigned by analysts in the past three months. The average Apple stock price target is $248.96, implying 16.7% upside potential.
The Bottom Line on Apple Stock
Apple stock certainly isn’t cheap, as indicated by its price-to-earnings and PEG ratios, and the outcome of this Google case could represent a long-term headwind for the company to overcome. Warren Buffett’s decision to reduce Berkshire Hathaway’s holding also reaffirms these overbought concerns.
However, analysts remain fairly bullish on the stock, and there’s likely to be a long-term supportive trend in the form of AI. It’s not enough to make me bullish, though, as I realize that forces are moving in both directions.
