Google Antitrust Ruling Threatens Apple’s Profit Engine—Here’s How

Big Tech's house of cards just got shakier. The landmark antitrust ruling against Google could send shockwaves through Apple's revenue streams—and Wall Street isn't ready for the fallout.

### The $20 Billion Question

Apple's search deal with Google—the one that quietly funds your 'free' iPhone—now faces existential scrutiny. When regulators cut this golden cord, Cupertino's profit margins bleed.

### Ecosystem Warfare

No company mastered the art of mutually-assured monetization like these frenemies. But with Google forced to unbundle its empire, Apple's 'walled garden' suddenly looks more like a sandcastle at high tide.

### The Cynic's Bottom Line

Funny how antitrust remedies always seem to arrive 15 years late—just in time for bankers to short the stock and politicians to claim victory. Meanwhile, crypto protocols laugh from their decentralized trenches.

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 -1.21%) and(MSFT -1.61%), 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.