Apple's woes deepen following Epic Games ruling. Here's where we stand on the stock now

CNBC

a day ago

Apple suffered a major blow in its bid to alleviate one of Jim Cramer's biggest worries about the tech giant: its legal fight with Fortnite maker Epic Games. A U.S. appeals court late Wednesday rejected Apple's plea to halt mandated changes to its App Store that the company has warned could cost it "substantial sums." "Apple's had a bad streak. This is just more negativity," Jim said Thursday. Shares of Apple fell about 0.7% in Thursday's session, trading slightly above $201 apiece. The stock is down roughly 19% so far this year. The ruling Wednesday evening marked the latest setback for Apple in its long-running legal battle with Epic Games, which first sued the iPhone maker in 2020 in an attempt to force Apple to loosen its grip on purchases in apps that utilize its iOS operating system. In late April, a U.S. district judge said Apple was violating a four-year-old ruling that required Apple to change the way it charges commissions on in-app purchases. The solution that Apple implemented in early 2024 , for the first time, allowed developers to include links to external websites where iPhone app users could put in their payment info. However, Apple still charged a 27% commission on in-app transactions that linked out for payments and told developers how these links should be presented. The judge's April ruling said Apple needed to stop those practices. Now, Apple's request to have that decision paused has been denied. Wall Street analysts say this could dent Apple's financials – albeit not by that much. For example, Morgan Stanley estimated that 2% of Apple's earnings per share, 10% of App Store revenue and 3% of overall revenue for its important services division are at risk if the ruling is upheld. The basis for those forecasts is the firm's proprietary survey from May, which found that 28% of U.S. iPhone users are "extremely likely" to circumvent in-app purchases in the App Store. Despite the Epic ruling late last month, App Store growth has remained solid in May. Net revenues for the App Store increased 9.6% year over year in May, compared with an 8% year-over-year gain in April, according to Morgan Stanley, citing Sensor Tower data. "To date, our view has been the App Store injunction is a minor risk to the Apple story / a longer-tailed risk, as changing nearly 20 years of learned consumer behavior doesn't happen overnight," the analysts wrote in a Thursday note. The firm reiterated its buy-equivalent rating on the stock. JPMorgan shared similar sentiments. The analysts projected a "moderation" in services revenue growth and an up to 3% hit to earnings per share. "Although the denial of a stay is a headwind for Apple, we continue to believe the magnitude of impact is likely to be materially lower than currently being feared by investors," wrote the JPMorgan analysts, who also have a buy-equivalent rating on shares. While Jim indicated Thursday that Apple taking a 2% to 3% hit to EPS from the Epic case is a fair assumption, he expressed frustration with the overall implications of the ruling. "I think it is outrageous that they can use Apple as the equivalent of a common carrier, a Greyhound bus," Jim said Thursday. The Apple-Epic saga is one of the reasons why the stock has become such a worrisome position in recent months, Jim explained during our May Monthly Meeting. But it is not the only threat facing Apple's services division, which has long been a big part of our investment thesis in the company. The business — home to the App Store, AppleCare, ApplePay, iCloud and content subscriptions like Apple TV+ — is coveted for the recurring nature of its revenue streams and high margins. AAPL YTD mountain Apple's year-to-date stock performance. The other big risk to Apple's services business is Alphabet -owned Google's legal feud with the Justice Department. The antitrust case threatens Google's massive annual payments to Apple in exchange for being the default search provider on iPhone and iPad devices. In 2022, that was worth $20 billion for Apple. During the May Monthly Meeting , Jim described the matter as potentially "easy money gone," adding that investors "need to be concerned." Apple's woes don't stop there, though. Jim has an Apple worry even bigger than services growth: higher tariffs on electronics imports into the U.S. Last month, President Donald Trump threatened to raise tariffs on Apple by at least 25% for iPhones not made in the U.S. That does not bode well for the Club name because it's the company's biggest money maker. Plus, it's nearly impossible for Apple to get this done in the short term as the majority of its manufacturing is done overseas. CEO Tim Cook has tried to reduce Apple's reliance on China by diversifying its supply chain and expanding production into India. It hasn't been enough to appease Trump, though. All of this comes ahead of Apple's annual developers conference, which kicks off Monday. It has historically coincided with the start of a seasonally strong period for the stock. Investors will be closely watching what Apple says about its generative artificial intelligence system, dubbed Apple Intelligence. We previously thought that the suite of AI tools would usher in a much-needed upgrade cycle for the iPhone. This hasn't been the case as the rollout of new flashy features have been staggered and delayed. Still, we're not planning to bail on Apple shares down here. While there are clearly issues hanging over the stock, there's no denying its products are among the best consumer electronics in the world. As long as people aren't trading in their iPhones and leaving the Apple ecosystem, the ability to make money off that huge user base remains intact. And that's reason enough to stay in the stock. (Jim Cramer's Charitable Trust is long AAPL. See here for a full list of the stocks.) 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