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In the shadow of Apple’s (AAPL) bustling product releases and headline-grabbing innovations lies a significant regulatory threat that could have substantial implications for its stock performance. In recent developments, Apple’s long-standing relationship with Alphabet’s Google (GOOG) (GOOGL) is under significant threat due to the U.S. Department of Justice’s (DOJ) ongoing antitrust lawsuit. At the center of this legal battle is Google’s search engine deal with Apple and other smartphone makers, which makes Google the default search engine on iPhones. Jefferies analysts recently weighed in, highlighting the potentially severe financial repercussions this could have for Apple. According to their report, Apple could lose up to one-third of its revenue from Google’s search engine placement in fiscal 2028 if the DOJ wins the case.
In this article, we will explore how the potential breakup of Google could reverberate through Apple’s financial landscape, analyze the company’s fundamentals, and consider the broader implications for investors in the tech giant.
About Apple Stock
Founded in 1976, tech giant Apple (AAPL) has consistently set the benchmark in the technology sector. With a lineup that includes flagship products like the iPhone, MacBooks, Apple Watch, AirPods, and iMacs, all integrated within the ecosystem of its highly profitable Services business, the company has become the most valuable in the world, boasting a gargantuan market cap of $3.53 trillion.
Shares of the Cupertino-based behemoth have gained about +20% on a year-to-date basis, performing roughly in line with the broader market.
Jefferies Predicts Potential 11% Drop in Apple Stock as DOJ Antitrust Case Threatens Google Search Deal on iPhones
On Oct. 16, Jefferies analysts stated that it is “very likely” the DOJ will ban Google’s longstanding search agreement on iPhones, a move the brokerage firm predicts could lead to an 11% drop in Apple’s stock price.
The DOJ’s antitrust lawsuit against Google centers on the search giant’s agreements with smartphone makers, including Apple. Google has paid billions annually to Apple and other companies for prime placement on devices, but Jefferies analysts predicted that the DOJ would ban these deals in the future as it seeks to break up any search monopoly. Jefferies noted that if the DOJ ultimately wins following a series of appeals, the iPhone maker could lose a solid portion of its valuable revenue.
“Our antitrust experts in the U.S. Internet team believe that reaching a settlement may take 3 to 8 years. We expect that if Apple loses 1/3 of its revenue from Google in the 2028 fiscal year (limited to the U.S. only), our discounted cash flow (DCF) will decrease by about 8%,” analyst Edison Lee wrote in a note to clients. Jefferies estimates that the $25 billion deal accounts for 20% of Apple’s pretax profit and about 6.3% of total revenue, which could lead to an 8% to 11% drop in share prices.
Lee, who maintains a “Hold” rating on Apple, stated that any decline would be confined to the U.S. market, though he warned that other countries might follow suit if the DOJ wins its case. He also noted that this assumes no compensation from a revenue-sharing deal with Google or other search engines, representing the most pessimistic scenario.
The analyst added that, despite this unresolved issue, given that the iPhone represents approximately half of Apple’s annual revenue, sales of the iPhone 16 and the launch of Apple Intelligence are viewed as more important factors in the short term.
Nevertheless, if the DOJ blocks the Google-Apple deal, it would represent a major shift for both companies and might compel Apple to develop its own search engine or pursue deeper AI integrations - a route fraught with its risks. Also, the case’s outcome could have ripple effects throughout the broader tech industry, potentially creating opportunities for competitors like Microsoft (MSFT).
More News for AAPL Stock
To Lee's point, recent headlines around iPhone orders have been moving AAPL shares. On Oct. 23, Apple stock slid over 2% after TF International Securities analyst Ming-Chi Kuo issued a cautious note on iPhone orders.
“iPhone 16 orders were cut by around 10M units for 4Q24-1H25, with most of the cuts affecting non-Pro models. As a result, iPhone 16 production for 2H24 is now estimated at 84 million units,” Kuo wrote on his blog.
On Oct. 18, Apple shares gained more than 1% after Counterpoint Research data provided to Bloomberg News revealed that sales of the company’s latest iPhones in China rose by 20% in the first three weeks compared to the 2023 model. The report also noted that sales of the high-end Pro and Pro Max models increased by 44% compared to last year’s equivalents as consumers increasingly opt for the more expensive models.
How Did Apple Perform in FQ3?
On Aug. 1, Apple reported fiscal third-quarter results that topped expectations. The iPhone maker reported a new June quarter revenue record of $85.8 billion, marking a 5% increase from the previous year. AAPL’s top line surpassed Wall Street’s expectations by $1.42 billion.
For the most part, the company experienced growth across its individual product lines. For instance, Mac sales grew 2% year-over-year to $7.01 billion, driven by higher net sales of laptops. Even more notable was the iPad’s performance, which experienced a 24% year-over-year revenue increase to $7.16 billion, due primarily to higher net sales of the iPad Pro and iPad Air.
Also excelling during the quarter was Apple's Services business, encompassing a range of offerings such as advertising revenue from its platforms, AppleCare, cloud services for customers, digital content sales, and payment services including Apple Card and Apple Pay, and other services. The Services business generated $24.21 billion in revenue, up 14% year-over-year, primarily driven by higher net sales from advertising, the App Store, and cloud services. Notably, Services revenue rose to 28.23% of total net sales from 25.93%, boosting the share of recurring revenue streams within Apple’s total revenue makeup and indicating a strategic shift in Apple’s business model to higher-margin, recurring revenues.
It should be noted that the company experienced some softness in its wearables, home products, and accessories segment, where sales declined by 2% year-over-year to $8.10 billion. Also, the company reported a decrease in revenue from the iPhone, which is its most significant product. iPhone revenue fell by 1% from the year-ago period to $39.30 billion.
Apple’s profits also saw an improvement in the most recent quarter, with record business performance driving an 11% year-over-year increase in earnings per diluted share to $1.40. The bottom line topped expectations by $0.06. Operating cash flow increased from $26.38 billion to $28.86 billion, while EBITDA for the business grew from $26.05 billion to $28.20 billion.
Looking ahead, Apple’s solid earnings and revenue performance are likely to continue, supported by the growth of the services segment. The iPhone maker is set to announce its Q4 earnings results on Thursday, Oct. 31. Analysts tracking the company predict a 5.48% year-over-year increase in its earnings to $1.54 per share for the fourth quarter, with revenue anticipated to grow 5.28% year-over-year to $94.23 billion.
AAPL Stock Valuation and Shareholder Returns
Apple returned over $32 billion to shareholders during the third quarter of 2024, comprising $3.9 billion in dividends and equivalents, and $26 billion via open market repurchases of 139 million shares. The stock offers an annualized dividend of $1.00 per share, supported by 10 consecutive years of growth, resulting in a forward yield of 0.42%. Notably, the board authorized a $110 billion share buyback program earlier this year, marking the largest in U.S. history.
Assessing Apple’s valuation, the stock is trading at 35.25 times the consensus earnings estimate for FY24, above the sector median of 24.16x and its own five-year average of 27.65x. Also, AAPL’s forward EV/Sales multiple stands at 9.05x, well above the sector median of 2.97x and its five-year average of 6.41x.
As a result, some investors might view the stock as overvalued. However, it’s worth noting that some “Magnificent 7” competitors trade at even higher premiums relative to sector median levels, indicating that such valuations are typical for this group, and suggesting that AAPL stock may not be as overpriced as it initially appears.
Options Market Sentiment on Apple Stock
Examining the weekly November 1, 2024, option chain, there is a bid/ask spread of $5.35/$5.45 for the $230.00 CALL option and $4.25/$4.35 for the $230.00 PUT option. Keep in mind that this is the options strike closest to the current stock price. We can determine the anticipated price movement for AAPL stock after its earnings report by using the midpoint prices of these options:
4.30 (230.00 put) + 5.40 (230.00 call) = 9.70/230.76 = 4.2%
Based on current prices, the options market suggests that AAPL stock could potentially rise or fall by around 4.2% from the $230.00 strike price by the Nov. 1 options expiration using the long straddle strategy. That would place the stock in a trading range of about $221.06 to $240.45.
Notably, the ratio of open puts to open calls at the $230.00 strike price is about 1.21 to 1, with 5,910 open calls compared to 7,209 open puts. This indicates bearish sentiment in the options market and suggests expectations may be low ahead of earnings.
What Do Analysts Expect For AAPL Stock?
On Oct. 14, Apple stock rose over 1% after Evercore ISI added the stock to its “Tactical Outperform” list ahead of earnings. The firm anticipates that AAPL will report results that align with current estimates, which it believes should support a higher trajectory for the stock. Evercore ISI believes Apple is “well positioned to outperform against low expectations” in the September quarter and, “more importantly,” with its December quarter guidance. The firm maintains an “Outperform” rating and a $250 price target on Apple shares.
Apple stock has a consensus “Moderate Buy” rating. Among the 32 analysts covering the stock, 18 recommend a “Strong Buy,” four rate it as a “Moderate Buy,” nine advise a “Hold,” and one suggests a “Strong Sell.” The mean price target for AAPL stock is $245.13, indicating a moderate upside potential of about 6.2% from current levels.
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