What impact does the U.S. Department of Justice's lawsuit against Google have on Apple? Morgan Stanley analyzes: EPS may decline by 2%-23% in FY 2027 under four potential scenarios
Morgan Stanley analysis states that although Apple is not a party in the U.S. Department of Justice's lawsuit against Google, it is expected that its search partnership agreement with Google will be restricted, potentially leading to a 2% decline in earnings per share (EPS) to 23% for the fiscal year 2027. The firm maintains an "overweight" rating on Apple stock with a target price of $235. The ruling in this case will affect Apple's annual revenue of approximately $20 billion
According to Zhitong Finance APP, Morgan Stanley recently released a research report stating that although Apple (AAPL.US) is not a party in the U.S. Department of Justice's lawsuit against Google (GOOGL.US), the bank's basic expectation is that its approximately $20 billion annual search partnership with Google will be restricted. In the four possible scenarios evaluated by the bank, Apple's earnings per share (EPS) for the fiscal year 2027 could decline by 2% to 23%. However, the bank still maintains an "overweight" rating on Apple's stock, with a target price of $235.
Event:
It is reported that the U.S. Department of Justice's lawsuit against Google began in 2020, with the Department of Justice and attorneys general from 52 states and jurisdictions jointly suing Google. In August of last year, Judge Amit P. Mehta, who is responsible for the case, announced a ruling that found Google's search business violated U.S. antitrust laws, and he aims to make a ruling on remedies for the case by August 2025.
The U.S. Department of Justice continues to urge the court to impose severe remedies on Google, including requiring it to sell the Chrome browser. In addition to the Chrome browser, the Department of Justice also demands that Google sell its open-source web browser project, Chromium. Department of Justice attorney David Dahlquist stated that divesting subsidiaries is a common approach in antitrust cases. However, he also acknowledged that existing case law typically addresses monopolistic companies forming monopolies through acquisitions of other companies, which may not apply to Google's independently developed Chrome.
In response to the Department of Justice's proposal to sell Chrome, Google countered that it does not comply with legal precedents. However, Google also made concessions, stating that the company will stop signing exclusive agreements with device manufacturers like Apple to ensure Google becomes their default search engine.
Analysis:
Morgan Stanley stated that Judge Mehta's upcoming ruling on remedies for the case is significant, as it will reveal the future trajectory of the approximately $20 billion in annual revenue Apple receives from Google. Regarding this ruling, Morgan Stanley believes that four scenarios are most likely to occur.
Scenario 1: The most severe remedies + Apple launches its own search engine
The most severe remedies from the U.S. Department of Justice are approved (i.e., Google cannot monetize), and Apple is forced to launch its own search engine. Morgan Stanley believes that the probability of this scenario occurring is extremely low, as documents submitted in the Google case clearly indicate that Apple has no intention of launching its own search platform (the bank believes that advancements in AI have not changed this position).
However, if Apple is indeed forced to launch its own search engine, its EPS for the fiscal year 2027 is expected to decline by more than 20%, due to the initial low monetization of the search business and the need to spend over $10 billion annually to support the construction of the search platform. In this scenario, Apple's stock price earnings ratio may fall to the range of 22-24 times, with the stock price bottoming out close to $150. But Morgan Stanley emphasizes again that this is the scenario they believe is least likely to occur.
. In this scenario, Morgan Stanley estimates that Apple's annual traffic acquisition cost (TAC) revenue will decline by more than 60%, as the monetization capability of other non-Google search engines is far inferior to that of Google, which will lead to a 12% decline in Apple's EPS for the fiscal year 2027.
Additionally, in this scenario, the user experience for Apple may suffer negatively, as even though Google remains the industry-leading search engine, Apple cannot use it as a search option. Morgan Stanley expects that in this scenario, Apple's stock price-to-earnings (P/E) ratio will drop to 24 times, and based on an EPS of $7.64 for the fiscal year 2027, the stock price bottom will be $183, a decline of about 13% from the current price.
Scenario 3: The most severe remedial measures + Apple signs an exclusive agreement with a non-Google search engine
The U.S. Department of Justice's most severe measures have been approved, and Google cannot pay Apple. Apple signs an exclusive agreement with a non-Google search engine. Evidence in the Google case indicates that some non-Google search engines have actively approached Apple, hoping to replace Google as the default search engine for Safari. Morgan Stanley believes this scenario has the least financial impact on Apple, as whether it is Bing, DuckDuckGo, or emerging AI search platforms, they are likely willing to pay high fees for exclusive status on iOS, macOS, and iPadOS. It is expected that in this scenario, Apple's EPS for the fiscal year 2027 will only decline by about 2% (the firm believes this estimate is still conservative). Although the financial impact is small, this scenario may mean a reduction in Apple's user experience due to the unavailability of Google. Morgan Stanley expects that this scenario will not have a significant impact on Apple's stock valuation and is a "better than expected" outcome, but the choice of partners is crucial for user experience.
Scenario 4: A milder remedial measure + Google loses exclusive agreement for search but can still pay Apple
Morgan Stanley believes this is the most likely scenario—that is, Google will no longer be allowed to pay for the default search position on Apple's platform but can still monetize on the Apple platform, while Apple can also monetize through the "choice screen" and TAC payment mechanism from other search engines In this situation, Morgan Stanley expects that Apple's EPS for the fiscal year 2027 will decline by only about 2%, with almost no impact on user experience. Considering that Apple has launched the "options screen" in the European Union and has not yet observed any negative impact on service revenue growth, Morgan Stanley believes that this 2% EPS decline estimate may still be conservative, and the financial impact on Apple is likely to be very limited.
