Evercore: Apple's service business may face "double trouble" from Epic and Google's lawsuits, potentially leading to a "double hit" in revenue
Evercore pointed out that Apple is facing significant challenges in its services business, primarily stemming from the legal dispute with Epic Games and the lawsuit involving Google and the U.S. Department of Justice. Analyst Amit Daryanani stated that the annual payment of $20 billion to $24 billion from Google to Apple to become the default search engine for Safari may be affected by the DOJ lawsuit. Additionally, Apple's App Store is also at risk due to the lawsuit with Epic. It is expected that Apple's services revenue for fiscal year 2024 will reach $96.17 billion
According to Zhitong Finance APP, Evercore pointed out that Apple Inc. (AAPL.US) is facing significant challenges in its lucrative services business, on one hand due to the ongoing legal disputes with Epic Games, and on the other hand, the lawsuit involving Google (GOOGL.US) by the U.S. Department of Justice may impact Apple's earnings.
The Evercore team, led by analyst Amit Daryanani, stated in an investor report: "Google pays Apple between $20 billion and $24 billion annually to be the default search engine for the Safari browser. We estimate that about 50% of this comes from the U.S. market, and therefore may be affected by the ongoing lawsuit from the Department of Justice."
Daryanani added: "This payment is part of a revenue-sharing agreement, where Google shares a portion of the advertising revenue it earns through Safari with Apple. With the rise of AI search options, there are concerns that the revenue from this agreement may begin to decline, and Apple's testimony in the lawsuit indicates that Safari search volume experienced a historic decline for the first time in April."
Earlier this month, the U.S. Department of Justice proposed a remedy requiring Google to sell its Ad Manager and Ad Exchange to curb its anti-competitive behavior. Google disagrees with the court's ruling on Ad Manager and stated that it will appeal.
Meanwhile, Apple's services business, a significant revenue source, the App Store, is also at risk due to the lawsuit with the popular game developer Epic for "Fortnite." Apple's services business revenue reached $96.17 billion in fiscal year 2024, up from $85.2 billion in fiscal year 2023.
Daryanani stated: "In the ongoing lawsuit between Apple and Epic, the judge ruled that Apple must allow third-party transactions on the iOS system and cannot charge fees for these transactions. We estimate that the $7 billion revenue Apple earns from U.S. developers is at risk. Assuming this $7 billion is completely lost, earnings per share (EPS) would be impacted by 6%, but we believe the actual impact may be smaller."
Evercore also noted that given "the judge's ruling may be deemed an improper deprivation of private property," there is a possibility that the ruling could be overturned on appeal. However, Evercore maintains an "outperform" rating on Apple with a target price of $250.
Seeking Alpha analyst Oliver Rozenko pointed out: "The court ruling in April 2025 explicitly prohibits Apple from obstructing developers from directing users to external payment systems, overturning Apple's attempt to impose a new 27% commission on external transactions, which is a significant legal setback. If developers widely adopt external payments, Apple's multi-billion dollar revenue stream from the U.S. App Store may face substantial shrinkage."
