Apple (AAPL) Risks Losing 10% of EPS Amid Google (GOOGL) Antitrust Suit

The Department of Justice (DoJ) sued Google (NASDAQ: GOOGL) yesterday on an alleged monopoly over the online search industry. The lawsuit notes that GOOGL has a market share of 88% in the U.S. search market, while a significant portion of this share comes from Google’s partnership with Apple (NASDAQ: AAPL).

“Google has almost completely shut out its competitors from mobile distribution,” the lawsuit notes.

Interestingly, Google employees refer to the prospect of losing default status on Apple devices as a "Code Red" scenario.

The search giant is dependent on search traffic from iPhones as Google is a default search engine on Apple's Safari phone browser. According to the lawsuit, Apple CEO Tim Cook and Google’s CEO Sundar Pichai had a meeting two years ago to discuss search-revenue growth.

The lawsuit forecasts that the partnership accounts for between 15% and 20% of Apple’s annual profits. The government projects that Google pays around $11 billion to Apple for pole position on the iPhone. On the other hand, iPhone-generated search traffic adds up to half of Google search volume.

“This lawsuit would do nothing to help consumers. To the contrary, it would artificially prop up lower-quality search alternatives, raise phone prices, and make it harder for people to get the search services they want to use,” wrote Kent Walker, Google’s chief legal officer, in a blog post.

“On Android devices, we have promotional agreements with carriers and device makers to feature Google services. These agreements enable us to distribute Android for free, so they directly reduce the price that people pay for phones,” Walker added.

Wamsi Mohan, an analyst at BofA Securities, believes that a potential response would be to no longer retain the revenue sharing agreement.

“In effect users would have to “opt-in” to using the Google search feature on Apple devices that would put other competitors on equal footing as a gateway to search. Ultimately any changes to the rev share agreement could lead to a potential rev/margin headwind in services that may result in the valuation multiple contracting,” Mohan wrote in today’s note to clients.

The firm estimates that almost all the revenue flows to Apple's net income and can account for up to $0.50 in EPS, or approximately 10% of EPS.

BofA Securities analyst Wamsi Mohan reiterated a Neutral rating and $140.00 price target on Apple (NASDAQ: AAPL)

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $117.51 yesterday.

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