Why Apple's Stock Was the Dow's Worst Performer on Friday

Apple (AAPL) sold off on Friday 3.3%, making the stock the worst performer on the blue-chip benchmark the DJIA (USA 30 - Wall Street). This decline was the company’s shares’ largest drop since May. (source: bloomberg.com)

The decline was seen as a result of a federal court ruling, in which the judge said Apple must change its method of operation. In the Epic Games vs. Apple court case, the federal judge ruled that Apple must allow developers to move the purchase transactions of their products to different applications. This will allow sellers to directly charge customers, cutting Apple out. The iPhone maker has 90 days to comply, in what is seen as a major loss to the company.

This is the first time Apple’s app store payment dominance is being contested, and some see this challenge as a huge blow and a threat to the company’s revenue stream. To try and gauge the potential losses, here are some figures:

The mobile games market is already almost a $100 billion industry and is forecast to multiply to $272 billion by the end of the decade. 

The way Apple structured its App Store was to prevent competitors access. This format forced developers to enable purchases through Apple, which charged a 30% commission on these transactions. 

U.S. District Judge Yvonne Gonzales Rogers’ ruling to force Apple to open up its App Store to competitors threatens its $20 billion profit a year, with a profit margin of over 75%.

Morgan Stanley Sees “Compelling Setup” Ahead of Annual Event

However, not everyone is concerned about Epic Games vs. Apple and the federal ruling, opening mobile games to competition. Some analysts are bullish on Apple despite the fact that it was losing its grip on purchases made on its app even before this court case. Investors appeared to shrug off any concerns when Apple announced it will allow developers of reader apps to set up links to their own websites - outside of Apple’s domain. This policy change caused Japan’s fair trade commission to close its investigation. Apple’s stock actually rose that day 66 cents from the 152.45 closing price of August 31st to the settlement price of 153.11, on September 1st.

Moreover, analysts like Morgan Stanley’s (MS) Katy Huberty see the lack of significant buying into Apple’s stock before its annual event, launched on September 14th, as a potentially bullish indication. Huberty conferred with Apple supply chain research analysts, who predict an active autumn, busy with product launches. 

However, Morgan Stanley’s Huberty does not perceive a potential for gains just because of a general lack of demand for Apple’s stock. She is especially impressed with how she believes institutional investors, in particular, are positioned regarding Apple. Huberty estimates that these major investors are either neutral or even negative about the stock, but characterises these conditions as a “compelling setup”. That means that if iPhone 13 demand beats expectations, Apple could rise to a minimum of $168 and even as high as $245.

Notice that the investment bank’s analyst has completely sidestepped the case, suggesting she doesn’t see it as a meaningful risk to the company’s continued growth. The well-known analyst says Epic Games vs, Apple and other issues around the world, including a South Korea App Store bill and an antitrust case in India, will have a “minimal financial impact". Huberty asserts the worst-case scenario is a 1% to 2% effect on the company’s earnings-per-share. Huberty points out that in the last seven years, the tech giant’s shares have risen by an average of 1 percent in the week following the yearly event. 

Will Apple’s revenue really be significantly reduced, or will the iPhone maker's continued profits make up for any potential app store related loss?