DOJ Lawsuit Against Google Bizarrely Raises Risks For Apple
The above raises an uncomfortable question that we want to address directly:
Why the heck would you want to exclude a tremendous company like Apple from your portfolio?
It isn't because the iPhone maker isn't a great company. It most certainly is. The question is sort of whether they can become an even greater great company.
That is where it gets tough.
It isn't new that Big US Tech companies have had a great year. Both their profits and their stocks have been the story in financial markets and portfolios around the globe.
However, one of the many questions when you are looking forward is that there are many risks to these profits on the horizon.
Right at the very top is the risk of government regulation and litigation that simply limits the ability of these companies to make similar levels of profit and revenue as they have in the past.
There has been lots written and discussed on this front in the past. Quite a bit of the debate obviously circles around whether an individual case is likely to succeed or not and what the implications might be for the company charged.
That isn't the only risk however. There is also the fact that, like any good drama, these cases unveil lots of proprietary and privileged information that is normally kept tightly under raps and could lead to other litigation or simply knock on effects.
There is a perfect example of this going on right now with the Department of Justice's new lawsuit against Google.
The case revolves around Alphabet (Google's parent company) allegedly monopolizing advertising technologies. As usual, we don't feel like we have much of an edge one way or another but it seems very possible that the US government could lose the case based on some very wooly thinking.
Long story short, proving a company is monopolizing anything in the highly competitive landscape of online advertising is no small task.
That isn't all however. One of the most intriguing facets of this lawsuit is the sunlight being cast on the surprising and little known fact that Apple and Google are both rivals in some (many?) areas of business but also partners in others.
The former gets a lot of attention: iOS vs Android, iPhone vs Pixel, open source vs tightly controlled proprietary space etc. The latter almost not at all.
This was until none other than Microsoft CEO Satya Nadella took the stand and dramatically discussed how these two tech giants work together in a few key areas.
In particular, he highlighted the payment that Google makes to Apple every year to be the default browser on Apple devices.
This obviously excludes Microsoft's Bing search engine and so the company's CEO discussed the fact that he has tried for years to do a similar deal with Apple but without any success.
The real surprise, however, might be just how valuable and important that deal with Alphabet/Google is for Apple.
The amount paid for Google search to be the default browser has long been a tightly kept secret. Analysts, though, have estimated it could be as high as $20 billion a year. Goldman Sach's Eric Sheridan estimates $16 or so billion. In open court, a government lawyer argued it was likely more than $10 billion during opening arguments.
That statement and that number specifically drew howls of protests from both sides of lawyers ostensibly because it was revealing non public information but it also might have been because it was eerily close to the mark.
The big headline, though, is that this money, whatever the precise amount, could now be under serious risk. The idea being that this payment would be to collusion in furtherance of a monopoly and so illegal if the government's case goes against Google/Alphabet.
The conclusion is that Apple could lose serious revenue thanks to blowback arising from a government case against a rival company.
A bit of necessary context on the long standing deal between Google and Apple:
For Apple the so-called "Information Services Agreement" is the stuff of corporate c-suite dreams.
The iPhone maker receives billions of dollars for something it would probably want do anyway - put Google as the default search browser on their devices. This works for everyone involved because Google Search is popular with Apple's customers and Google wants to make sure it stays that way. Microsoft's Bing or a niche search product like DuckGoGo or Kagi would be both unpopular and also likely still inferior to the reigning champion.
The incredible thing is that if Google (Alphabet) loses this case then that payment may disappear. And even for a company like Apple that would be very, very painful.
Let us just say that $20 billion is the number and it disappears. That amount would be around 5% of Apple's predicted 2024 revenues and would mean a cut of around 16% of profits. That is likely extreme but it does reinforce the idea that this is not a small sum.
Regardless of how big the amount is and how much is lost, it is very certain that it will not be easily replaced. It is rather difficult to find someone willing to give you tens of billions of dollars to install a product you would love to use anyway.
This is just one of the risks that Apple faces in 2024. The others we have covered are:
a tepid product launch
difficulty in raising key product prices any higher
and the fact that the Cupertino giant is finally suffering from the rising tit-for-tat China-US back and forth.
We also haven't yet written about the fact that they are trying and failing to develop more of their own chips either. That is also costly because they are plowing profits into Research & Development but not seeing anything yet and having to pay serious amounts to the likes of Qualcomm.
In a way, all of this is nothing new. There are always risks for a major multinational like Apple. The reason they are a $3 trillion dollar company is because they have overcome most of them. Their leaders and employees have found that consumers will pay higher prices, they have charmed other countries, they have made huge technical progress etc.
But what is perhaps different this time is they are combining at an unwelcome time and involve many of Apple's most important places of business (China), partners (Google) and products (iPhones) and hardware (semiconductor chips).
We write about this phenomenon semi-frequently. Often high flying companies and stocks are not brought down by a single catalyst but rather a host of issues that combine and metastasize and suddenly what seemed like an unassailable titan and profit making machine instead suddenly look like they are under-siege from every direction.
Also keep in mind that the company is also richly valued. As we covered in our first story, despite being down some 8-9% since July, Apple is still a company with a $2.6 trillion dollar market cap and one with an eye watering Price-to-Earnings ratio of 30.
That gives us pause and should for you as well.
These risks will likely keep Apple's share price capped to the upside and hamper the ability for the stock to break to a new, higher ground in the fourth quarter or 2024
That means, of course, that all the risk is to the downside. And it is not as if there are not plenty of catalysts that could send Apple's shares lower.
So, incredible as it sounds, might just be time to exclude one of the world's best companies from your portfolio....
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