Sales of 5G iPhones are expected to boost growth for services such as Apple Music and the App Store, both of which are expected to grow at a healthy pace at Apple, Inc. (AAPL). However, the service business is now subject to litigation from the U.S. Department of Justice. Also, pending legislation in the United States and Europe could reduce their commissions on applications and lead to further changes.
“We believe that government action (with antitrust, executive order, and legislation) represents one major risk to Apple’s shares,” said Tom Forte, an analyst at D. Davidson & Co, who wrote the letter to clients and added that he hoped Apple’s management would address the risks posed to the company’s revenue today.
Effect on Sales
Analysts expect Apple’s service sales to expand by 24.1% to $16.33 billion, almost a fifth of the entire sales revenue of $73.30 billion, which is consistent with IBES data from Refinitiv on July 26.
You’ll remember that Epic Games sued Apple for its commissions on the App Store in 2020. According to Cowen & Co analyst Krish Sankar, this likely happened because the Apple App Store was only offering about 6% of its total revenue and between 10% and 15% of its profit.
Risks Faced by Apple
Apple also faces the risk that the U.S. Department of Justice can bar Google’s Alphabet Inc (GOOGL) from paying to be a search engine on the iPhone, Angelo Zino of CFRA Research wrote in a research book last week. Officials from the Department of Justice have pointed out that Google could be paying Apple as much as $8 billion to $12 billion a year.
Projection of iPhone Sales
Meanwhile, analysts expect the company to see an increase in iPhone sales in its third quarter, with sales rising by 28.7% to $34 billion, according to Refinitiv data released July 26. The iPhone is the largest contributor to Apple’s overall sales.
In a note to investors last week, JP Morgan analyst Samik Chatterjee wrote that the growth of Apple’s business led to a turnaround in the company’s high value, with shares trading at around 30x earnings. As recently as 2019, stocks have been trading regularly for less than 20 times earnings as investors have always been cautious about the company’s high reliance on iPhone sales.