Justin Sullivan
A federal appeals court decision to uphold an order forcing Apple (NASDAQ:AAPL) to allow link-out payments from its App Store for purchases might not impact revenue as much as feared, but it could lead to earnings per share headwind of 2-3%, according to analysts.
Apple shares edged up 0.4% during early market action on Thursday.
“We do not expect all developers to move immediately out of the Apple ecosystem, and initial App Store data from May supports this thesis, but the June data will be the real test,” said Evercore ISI analysts, led by Amit Daryanani, in an investor note. “We think some developers will choose to remain within the ecosystem despite the higher fees due to the convenience, trust, and frictionless experience Apple’s billing system provides. We also think Apple has a strong argument to make to the appeal’s court that the lower court’s decision constitutes an unjust seizure of Apple’s private property.”
The appeals process could take up to two years or more. Despite the order taking effect on April 30, Evercore noted that App Store revenue increased 13% overall in May, and grew 10% in the U.S. market.
“The App store generates ~$21B in sales annually,” Evercore said. “As part of the ongoing AAPL vs. EPIC lawsuit, the judge ruled that Apple had to allow third-party transactions on iOS, and it was not able to charge a fee on those transactions. At risk is the ~$7B we estimate Apple earns from charging fees to US developers. Assuming that $7B fully went away, it would imply a 6% hit to EPS, but we think the actual impact will be smaller.”
J.P. Morgan estimated the order could create a 2% to 3% headwind for Apple EPS.
“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,” said J.P. Morgan analysts, led by Samik Chatterjee, in a Thursday note.
Meanwhile, Morgan Stanley, citing a recent survey it conducted on U.S. iPhone users, said 2% of Apple EPS is at risk. The survey found that 28% of respondents would be “Extremely Likely” to circumvent App Store payments.
Chatterjee said, “if real-world behavior mimicked our survey, 10% of App Store revenue, 3% of Services revenue, and 2% of Apple EPS would be ‘at-risk’.”
“Leveraging the data points from our latest AlphaWise survey, we estimate the revenue at risk from this injunction is ~$3.7B, assuming 28% of US App Store revenue would link-out (both in-app purchases and subscriptions) and Apple would collect a 0% take rate, equating to an EPS impact of 16c (or 2%) in a worst-case scenario,” he added.
Evercore also noted that gaming constitutes the bulk, or 65% of U.S. App Store revenue, with many of these being one-time purchases of $0.99. If users go to alternative payment sites, such as Stripe, which charges 3% plus $0.30 per transaction, it would amount to a higher payment than the 27% charged by Apple.
Apple highlighted that for more than 90% of billings and sales through the App Store in 2024, developers did not pay any commission.
“It’s incredible to see so many developers design great apps, build successful businesses, and reach Apple users around the world,” said Apple CEO Tim Cook.