Wall Street analysts believe the favorable antitrust ruling won by Alphabet could benefit Apple even more, by letting the iPhone maker license generative artificial intelligence products outside of the Google ecosystem. After Google was found to hold an illegal monopoly in its core market of internet search last year, the U.S. Department of Justice suggested Alphabet divest some of its assets, including selling off its Chrome browser. But the company avoided a worst-case scenario on Tuesday after a U.S. District judge ruled against some of the more severe proposed consequences, including a potential breakup. In the decision, the court said Alphabet won’t be forced to sell Chrome, but will be barred from exclusive contracts that condition payments or licensing. In response, Wall Street sent both Alphabet and Apple higher, with investors viewing the decision as an even bigger win for the iPhone maker. Alphabet and Apple gained anywhere from 3.5% to 8.5% each in early trading. “In what we’d describe as a near best-case scenario, AAPL can still collect [traffic acquisition costs] from GOOGL (with conditions) and can renegotiate the default search socket annually, better than our prior ‘Scenario 4’ framework & likely resulting in an immaterial, to potentially positive, financial impact,” Morgan Stanley wrote in a Wednesday note. While Google will have to stop exclusivity payments for using its search function, the company can still pay for distribution on iPhones, including as the default search engine, Baird said. The bank estimated Google’s annual payments to Apple at roughly $20 billion, or about 20% of Apple’s Services revenue — 5% of its total revenue — and include “disproportionately high margins.” Analysts also highlighted Alphabet’s loss of exclusivity as a major catalyst for Apple, since this will allow it to license other non-Google AI products even though Google’s payments will continue to Apple. “Non-exclusivity remedies allow AAPL to license non-GOOGL GenAI products (e.g. OpenAI),” TD Cowen wrote. “AAPL’s Safari browser has the option for alternative [generative search experiences] for many years and AAPL currently licenses OpenAI’s ChatGPT product.” TD Cowen added that Google’s revenue share payments could be a benchmark and “valuable pricing reference” to negotiate future revenue sharing from various generative AI partnerships, especially once Apple begins planning to offer a generative AI search option in its Safari browser. This will likely become more relevant as chatbots grow more popular as an alternative to the traditional search engine experience. Tuesday’s positive decision helped reinforce Wall Street’s bullish view on shares of Apple, with most analysts maintaining their buy-equivalent rating. Here’s what analysts at some of the biggest investment banks had to say after the ruling. Bank of America: Price target raised to $260 Bank of America lifted its price target to $260 per share from $250, implying upside of about 13%. “While details and nuances of the ruling and their implication on Apple are still to be determined, and Google has the option of appealing this decision, in our opinion, we do not see an immediate material change to the current Apple-Google relationship and payment structure. Longer-term, data sharing with other search engines/Gen AI providers could pose headwinds to Apple from lower Google TAC payments … This ruling gives us more confidence in our Services revenue estimates which we model to grow 12% y/y in F26/F27. We est. 37% of Services revenue comes from Licensing of which Google TAC is a major contributor (22% of overall Services revenue).” Morgan Stanley “What we learned from Judge Mehta tonight should be viewed as the best-case outcome for Apple, and better than the ‘most likely’ Scenario 4 we highlighted in our prior analyses. Why? Because (1) GOOGL can continue to pay Apple to distribute search, (2) Apple can still set a default search engine (incl GOOGL) and receive payments for that, so long as Apple promotes other search engines and the default search engine is changed annually, and (3) Apple can — but is not required to — introduce a search choice screen to help recoup any change in payment terms related to the prior default search exclusivity Apple had with Google. Effectively, Apple needs to offer a bit more flexibility in distributing search to users, but the remedies are even more watered down than we expected.” Baird “For AAPL, we suspect it could continue to receive significant distribution payments from Google and of course over time could also evaluate opportunities with emerging platforms like OpenAI, Perplexity and others as they build broader ad platforms.” TD Cowen “We view the remedies as largely favorable for AAPL’s advertising services business where third-party licensing agreements with GOOGL represent a low-20% of Service revenues and ~10% of total company gross profit. We believe GOOGL rev sharing could be in the low- $20B range despite Google search queries on the Safari browser declining for the first time due to the impact of GenAI chatbots on end user behavior.” Goldman Sachs “Given Apple can continue to receive traffic acquisition cost payments from Google, we view this decision as positive for AAPL, which we estimate to have received nearly ~$23 bn in TAC revenue in F2024. Further, the court ruling provides insight into Gemini Commercial Agreements, which provide for payments from Google to smartphone OEMs and wireless carriers for the distribution of Gemini experiences on its devices. This reinforces our view that Gen AI app & experience distribution presents a new and growing revenue stream for Apple and the US wireless carriers — similar to search TAC, but for Gen AI.” Citi “The antitrust ruling on Google removes a major overhang and downside risk on the Apple stock. Google is allowed to continue to pay TAC fees to Apple for it to be set as the default search engine so long as the deal is not exclusive, which means Apple 1) can promote other search engines, and 2) can set a different search engine on different operating system versions or in a privacy mode and makes changes, if needed, on an annual basis. We believe this could change pricing and help Apple negotiate the deal annually.” UBS “As part of the remedies proposed by the DOJ Google is prohibited from entering into or maintaining ‘exclusive distribution agreements’ covering Google Search, Chrome, Google Assistant and its GenAI products with partners including Apple on any device. However, Google will not be barred from making payments or offering other consideration to distribution partners for pre-loading or placement of Google products, effectively keeping the door open for Google to continue to pay Apple an estimated $20B to $25B annually.” Evercore ISI “Google pays Apple $15-20B/year in order to be the default search engine on Safari and we estimate around 50% of this is U.S. based. Though worth noting there is a ‘fixed’ and ‘variable’ component to this that we don’t know the split of. The payment is a revenue sharing agreement where Google shares a portion of the money it makes on advertising as a result of Safari searches. The rise of AI search options has raised concerns that revenue from this agreement will start declining given Apple’s testimony in the case indicated Safari search volume declined in April for the first time ever. On the AI front, AAPL today does get paid from Open AI for the default status on the LLM front.”
