Apple (AAPL +1.18%) shares have been trending higher lately due to news that has assuaged investor concerns about the impact of recent tariff hikes on profitability. However, there's another possible risk to Apple's future profitability that few are talking about: the Google antitrust ruling.
Make no mistake: The judge's ruling could negatively affect Google's search market dominance. In turn, this could be bad news for shares in Google's parent company, Alphabet (GOOG +2.92%)(GOOGL +2.53%). Then again, at least for Alphabet, alongside these potential negative consequences is the potential for the judge's decision to serve as a catalyst for Alphabet stock in the coming years.
Unfortunately, there's no such silver lining for Apple. Instead, the iPhone maker faces the prospect of losing some or all of a key revenue source. Following the judge's decision, if this risk becomes more apparent, it could lead to a new round of volatility for Apple stock.
Image source: Getty Images.
The Google antitrust ruling, potential remedies, and an impending final decision
Back in 2020, the U.S. Department of Justice (DOJ) filed a civil suit against Alphabet's Google subsidiary. The suit alleged that some of Google's practices, such as search engine exclusivity agreements with device makers such as Apple, were monopolistic and anticompetitive.
This suit, known as United States v. Google LLC (2020), went to trial in September 2023, and in August 2024, Judge Amit Mehta ruled in the DOJ's favor. Post-verdict, both the DOJ and Google submitted proposed remedies to address Google's practices deemed anticompetitive. These proposals were presented in a separate remedies case held last spring.
The DOJ's proposal called for some pretty severe remedies, including an end to Google's search exclusivity deal with Apple, as well as divestitures of Google's Chrome browser and Android mobile operating system businesses.
Google, on the other hand, has proposed milder remedies. For instance, changes such as allowing customers to choose whether to make Google the default search engine on a device. This month, Judge Mehta is expected to issue his final ruling on the remedies. If he rules in favor of a search exclusivity ban, such news could lead to a big drop in Apple's annual earnings.
Why the final ruling could reduce Apple's profits by double digits
As discussed earlier, there may be a silver lining in all of this for Alphabet. Even a ruling that calls for a divestiture of Chrome and Android could bode well for Alphabet stock in the long term. As analysts at D.A. Davidson recently argued, a breakup of Alphabet into separate companies could unlock significant value.
Per the analysts, Alphabet's breakup value could be as much as $304 per share. That represents a more than 54% premium to the current GOOG stock price. On the other hand, Apple could lose a little or a lot from this pending decision.
According to J.P. Morgan analyst Samik Chatterjee, Google pays Apple around $28 billion per year for search traffic generated from Apple devices. Of that figure, around $12.5 billion comes from U.S.-based customers. These payments likely have a nearly 100% gross margin. Over the past 12 months, Apple has had an effective income tax rate of around 24%.
This suggests that if the judge's decision includes an end to the search exclusivity deal, this would reduce Apple's annual earnings by $9.5 billion, or around 12%. The impact of this wouldn't be immediate. Google is likely to appeal the judge's remedy decision. Still, based on Apple's current valuation, the market currently assumes Apple's Google search revenue stream is not under threat. If this changes, it could lead to volatility for shares.
What This Means for Apple Stock in the Near-Term
Currently, Apple stock trades for around 31 times forward earnings. Although this valuation may seem reasonable relative to similar "Magnificent Seven" stocks, like Meta Platforms (META +1.33%) and Microsoft (MSFT +0.66%), in my view, Apple is overvalued, given the risks.
Why? Historically, Apple has traded for between 25 and 30 times earnings. At today's higher valuation, investors are likely expecting factors like Apple's recent increase in its artificial intelligence (AI) infrastructure investments to drive higher earnings growth going forward.
However, the impact of an end to Apple's search exclusivity agreement with Google could counter the benefit of its AI-related growth. Even if the judge accepts Google's milder remedy proposal, this may still lead to a reduction of Apple's Google search revenue, which would still likely affect overall earnings growth. If the judge's decision suggests any future impact on this key revenue stream, the market could react negatively, so I'm sticking to the sidelines for now.
