Why Apple’s Stock Is Struggling Thanks To A DOJ Lawsuit Against Google?
It has come out that Google pays out around $18 billion to be the default search engine on Apple devices.
We wrote about this a few weeks ago and argued in favor of the general idea that the payment could go the way of the dinosaurs and disappear from Apple's annual earnings.
Our piece was a warning: Apple can still be a great company but make less many.
You can read our old work here.
There are three important takeaways here:
This revenue is important for Apple's bottomline.
The iPhone company is hopeless to really influence the outcome of the legal proceedings.
The government might have a point.
The removal of this income stream would be a significant loss for Apple, we claimed. Anything short of a deep recession or a major war would be difficult to really bother the Cupertino giant but losing ~$20 billion in steady revenue could do it.
What might be even more significant is the simple fact that Apple isn't even a defendant in this case.
Their lack of involvement really underlines their plight:
One of the most powerful, wealthy and sophisticated companies on earth is, quite literally, watching helplessly from the sidelines as the government disputes the merits of a significant source of income.
Lastly, we have been pretty critical of government antitrust efforts but this might be an exception. There is little doubt that, on the face of it, paying to be the default search provider is pretty awkward. If Google search is so great, why must they pay Apple to be the exclusive provider? And if there is an auction to decide the search provider then why isn't it more open?
You can see the obvious problem here....$18 billion a year is a lot of money to pay for something that is supposed to be hugely desirable for the end consumer.
Paying a princely sum to be the exclusive provider of search strongly suggests that this about minimizing competition rather than improving the consumer experience.
Even the vibes are becoming more unpleasant. The judge in this case, Amit Mehta, is less and less open to the argument that information around these payments is privileged and needs to remains confidential.
In fact, he seems to believe that these arrangements should be far more transparent and out in the open. That, of course, is a bad sign for Google but even worse for Apple that has used the lack of public available knowledge about these arrangements to their advantage.
It is one thing to make an unseemly amount of money. It is quite another to be able to keep it hidden because, overall, you make so much elsewhere.
You can almost feel their lawyers squirming through the screen, can't you?
We aren't so sure the payment will be found illegal but we also aren't positive it will matter for a simple reason:
Apple may already be deciding that it will need to come up with another strategy for search. Some subset of this steady revenue will likely be lost.
If the "services" portion of Apple's revenue is under the threat, how about their other business units?
Well, we got information there as well. Apple reported earnings this week and there was also bad news on that front.
Their fourth quarter earnings beat analyst expectations for sales and earnings per share, but the company also revealed that overall sales fell for the fourth quarter in a row.
Every hardware business unit outside of the iPhone declined year over year, with big falls in the iPad and Mac product lines.
iPhone sales jumped higher on the back of the sale of new devices but were on a declining trend overall.
The bright spot was, ironically, the services business which leapt by 16%. As we have already discussed, a large chunk of this segment is under threat as the DOJ case against Alphabet progresses.
The takeaway is that Apple is being squeezed from both sides. Its hardware businesses are experiencing a cyclical slowdown as the global consumer is less robust. Meanwhile, the computer giant's strongly growing and countercyclical services business risks losing some or all of its largest customer's revenue.
This is why we feel even greater conviction in the idea that, incredibly, Apple could be a great candidate to be excluded from your portfolio.
It is just too difficult to envision the company's shares recovering to make new highs any time soon.
One insight might be that Apple reported that it will pay a dividend of 24 cents per share this month and said the company had spent $25 billion during the quarter on share repurchases and dividends.
That is pretty juice but all of this could be under threat if the services revenue plummets in the months or quarters ahead.
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