Apple Faces 6% EPS Hit as Legal Battles Threaten Services Revenue

Apple Inc. is currently navigating significant challenges in its services sector, according to Evercore. The company is under pressure from two major legal disputes that could potentially impact its revenue. The first challenge comes from Epic Games, with whom Apple has been engaged in ongoing legal battles. The second threat is posed by a lawsuit filed by the U.S. Department of Justice against Google, which could also affect Apple's earnings.

The legal dispute with Epic Games centers around Apple's App Store policies, which Epic alleges are anti-competitive and stifle innovation. Epic has filed a lawsuit against Apple, seeking to allow developers to bypass Apple's payment system and offer their own in-app purchase options. This could significantly reduce Apple's revenue from its App Store, which is a key component of its services business.

Evercore's team, led by analyst Amit Daryanani, highlighted that Google pays Apple between 200 billion and 240 billion dollars annually to be the default search engine in Safari. Approximately 50% of this payment comes from the U.S. market, making it susceptible to the ongoing lawsuit by the U.S. Department of Justice. Daryanani noted that this payment is part of a revenue-sharing agreement, where Google shares a portion of its ad revenue from Safari searches with Apple. With the rise of AI-powered search options, there are concerns that this revenue stream may start to decline. Apple's testimony in the lawsuit revealed that Safari search volume experienced a historic drop in April.

Earlier this month, the U.S. Department of Justice proposed a remedy that would require Google to sell its Ad Manager and Ad Exchange to curb its anti-competitive behavior. Google has disagreed with the court's decision regarding Ad Manager and plans to appeal. Meanwhile, Apple's services business, which includes the App Store, is also at risk due to its ongoing lawsuit with Epic Games. The App Store generated 961.7 billion dollars in revenue for the 2024 fiscal year and 852 billion dollars for the 2023 fiscal year.

Daryanani stated that the ongoing lawsuit with Epic could result in a 6% impact on Apple's earnings per share (EPS) if the 70 billion dollars in revenue from U.S. developers is entirely lost. However, he believes the actual impact may be less severe. Evercore also noted that the court's decision could be appealed and overturned on the grounds of improper seizure of private property. Despite these challenges, Evercore maintains its "outperform" rating and 250 dollars price target for Apple.

Analyst Oliver Rozanov pointed out that the April 2025 court decision explicitly prohibits Apple from blocking developers from guiding users to external payment systems, overturning Apple's attempt to impose a 27% new commission on external transactions. This legal setback could lead to a significant reduction in Apple's App Store revenue if developers widely adopt external payment options.