Evercore: Apple Inc.'s (AAPL.US) service business may face "enemy attacks" with Epic and Alphabet Inc. Class C (GOOGL.US) lawsuits potentially leading to "double damage" to revenue.

Evercore pointed out that Apple Inc. is facing significant challenges in its lucrative service business, on one hand due to the ongoing legal disputes with Epic Games, and on the other hand due to the US Department of Justice lawsuit involving Alphabet Inc. Class C that may impact Apple Inc.'s earnings. The Evercore team, led by analyst Amit Daryanani, stated in an investor report: "Alphabet Inc. Class C pays Apple Inc. $20-24 billion annually to be the default search engine on Safari browser. We estimate that about 50% of this comes from the US market, therefore it may be affected by the ongoing lawsuit by the Department of Justice." Daryanani added: "This payment is part of a revenue sharing agreement, where Alphabet Inc. Class C shares a proportion of the ad revenue they generate through Safari search with Apple Inc. With the rise of AI search options, there are concerns that the income from this agreement may start to decline. Apple Inc.'s testimony in the lawsuit shows that Safari search volume had a historic decline in April for the first time." Earlier this month, the US Department of Justice proposed a remedy requiring Alphabet Inc. Class C to sell its Ad Manager and Ad Exchange to curb its anti-competitive behavior. Alphabet Inc. Class C disagreed with the court's ruling on Ad Manager and stated that it will appeal. At the same time, Apple Inc.'s important revenue source from its service business, the App Store, is facing risks due to the lawsuit with Epic, the developer of popular game Fortnite. The service business of Apple Inc. generated $96.17 billion in revenue in the fiscal year 2024, compared to $85.2 billion in the fiscal year 2023. Daryanani stated: "In the ongoing lawsuit between Apple Inc. and Epic, the judge ruled that Apple Inc. must allow third-party transactions on the iOS system without charging fees. We estimate that Apple Inc. earns about $7 billion from fees charged to US developers. This poses a risk. Assuming the loss of this $7 billion, earnings per share (EPS) will suffer a 6% impact, but we believe the actual impact could be smaller." Evercore also noted that given the possibility that the court's ruling "may be considered improper deprivation of private property," there is a possibility that the ruling could be overturned on appeal. However, Evercore maintains its "outperforming the market" rating on Apple Inc. and a target price of $250. Seeking Alpha analyst Oliver Rozanke pointed out: "The April 2025 court ruling explicitly prohibits Apple Inc. from hindering developers from directing users to external payment systems, overturning Apple Inc.'s attempt to impose a 27% commission on external transactions. This is a major legal setback. If developers widely adopt external payments, Apple Inc.'s billions of dollars in revenue flow from the US App Store may face significant shrinkage."