Apple’s Revenue from Alphabet at Risk Amid Legal Challenges

Apple (NASDAQ: AAPL) generates significant profits from its device and service sales, but a key revenue source stems from payments made by Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) to keep its search engine as the default on iPhones.

Large Payments and Uncertain Future

In 2022, Alphabet paid Apple $20 billion for this arrangement, yet details about future payments remain unclear. This revenue stream is vital, as highlighted by Apple’s vice president of services, Eddy Cue, during recent court testimony, where he admitted that thoughts of losing this income keep him awake at night.

This payment is highly beneficial for Apple since it incurs no associated costs, making it likely to contribute directly to Apple’s bottom line. Analysts warn that if this $20 billion disappears, it could lead to a stock price crash.

Image source: Getty Images.

Implications of Potential Revenue Loss

During the trial regarding Google’s alleged illegal monopoly, Cue mentioned that Alphabet’s $20 billion payment was crucial and asserted that it potentially strengthens Google’s dominant position in the market.

He also speculated that AI-driven search technologies might eventually supplant Google’s traditional search methods, suggesting that Alphabet may reconsider their payment to Apple.

The financial implications of losing this payment are considerable. In recent years, Apple’s trailing 12-month net income has consistently stayed near $100 billion. A loss of the Alphabet payment could lead to an approximate 20% reduction in net income, severely affecting stock prices in a fully mature company like Apple.

AAPL Net Income (TTM) data by YCharts.

Such a dramatic decline might swiftly lead investors to label it a “crash,” a scenario Apple shareholders need to consider seriously.

Apple’s Stock Valuation Concerns

Currently, Apple’s stock is valued at a premium, suggesting it faces pressure to meet high expectations without any operational slip-ups.

AAPL PE Ratio data by YCharts.

The stock trades at 31 times trailing earnings and 28 times forward earnings, notably above the S&P 500’s 22.8 times trailing and 21.2 times forward earnings. Despite this premium valuation, expectations for revenue growth are modest, forecasted at just 4.1% for fiscal year 2025 and 6.1% for fiscal year 2026.

Given these conditions, investors might want to consider other major tech companies with fewer challenges and lower valuation ratios.

Should You Consider Investing in Apple Stock?

Before making any investment in Apple, it’s important to weigh this information carefully.

Recent analysis indicates that there are other promising stocks for investment that might yield better returns than Apple at this time.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Apple.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.