Jefferies analysts forecast that the U.S. Department of Justice (DOJ) is likely to prohibit the longstanding search agreement between Google and Apple, potentially causing Apple's (AAPL, Financial) stock to decline by 11%. Google is at the center of a major antitrust investigation due to the DOJ's scrutiny over its search engine's default status on smartphones and browsers.
Currently, Google pays Apple and other companies billions annually to secure its search prominence on their devices. Jefferies predicts that the DOJ will prohibit such transactions to break Google's search monopoly. Google's annual payment to Apple, about $25 billion, constitutes 20% of Apple's pre-tax profits and 6.3% of its total revenue, potentially impacting Apple's stock price by 8% to 11%.
The partnership began in 2002, allowing Google to become the default search engine on Apple devices, giving Google access to Apple's user base. Over half of U.S. search queries are conducted via Apple devices. During the trial, DOJ lawyers argued that Google's payments stifle competition and innovation, while Google claims its dominance is due to consumer preference, and switching search engines is easy for users.
Jefferies expects that if the DOJ ends these dealings, the effects may take years to materialize, with court decisions possibly requiring 3 to 8 years, followed by prolonged appeals. Nonetheless, this outlook is acknowledged as potentially "pessimistic." If the case drags on, Apple has time to adjust and offset any revenue loss, and the impact might be limited to the U.S., depending on Europe's response.
No comments have been made by Apple or Google representatives yet. Meanwhile, Apple's stock remains resilient due to investor optimism about upcoming products and new AI technologies. Still, halting the Google-Apple deal would signify a major shift for both companies, potentially pushing Apple towards developing its own search engine or deeper AI integration, a path fraught with risks.
For Google, the case threatens its ability to dominate the search engine market through financial agreements. The outcome could have broader repercussions in the tech sector, possibly benefiting competitors like Microsoft as global regulators keep a close watch. Google and Apple find themselves at a critical legal juncture that may reshape their futures.
