Apple’s Antitrust Armageddon: Why the DOJ Lawsuit Is a Game-Changer for AAPL Stock

Stock Market

The U.S. Department of Justice and 16 state attorneys general are suing Apple (NASDAQ:AAPL) stock for violating antitrust laws, causing the value of AAPL stock to drop by $115 billion on March 21. 

Bloomberg reported, “The US lawsuit alleges that Apple has used its power over app distribution on the iPhone to thwart innovations that would have made it easier for consumers to switch phones. The company has refused to support cross-platform messaging apps, limited third-party digital wallets and non-Apple smartwatches, and blocked mobile cloud streaming services, according to the DOJ.” 

On a percentage basis, Apple’s share price fell by more than 4% on the news. Berkshire Hathaway (NYSE:BRK.B), which owns 905.6 million shares of the iPhone maker (5.9% of its outstanding shares), saw a smaller decline of 0.6%. 

There are many reasons to own AAPL stock. It’s a great company.

However, this latest piece of news makes it a tad riskier, given what’s at stake. If you don’t own Apple stock but want to, you might be wise to do so by proxy, opting to gain admission through shares of Warren Buffett’s holding company. 

It’s a safer play. Here’s why.  

What’s At Stake With DOJ

Apple recently got fined $2 billion by the European Union for preventing Spotify (NYSE:SPOT) and other music streaming services from being removed from its platforms. More important than the fine were the changes required to Apple’s operating systems and platforms, including allowing third-party app stores and making Apple provide support for external payments.  

While a significant amount, it’s a pittance relative to Apple’s trailing 12-month free cash flow of $107 billion.

However, if successful, the DOJ antitrust lawsuit could be a much more expensive, bigger kettle of fish. Or, as some have said, it could be much ado about nothing. 

Consumers could benefit from a more open ecosystem, as ZDNet explained. 

“The success of the lawsuit against Apple could result in an era where users have more choices, including access to alternative app stores and many apps outside of Apple’s curated selection,” ZDNet senior contributing writer Jason Perlow wrote on March 21.

On the downside, it could make the Apple user experience less secure and private due to sideloading—the act of installing software on a mobile device that is not approved by an app store or software distribution channel—which tends to increase risks such as malware infections and other security-related issues. 

The pros and cons probably make any changes slightly favorable for consumers. However, the ramifications for Apple include lower App Store and iPhone revenue. 

The ultimate consequences are still very much up in the air, but a DOJ win appears to threaten Apple’s closed-loop ecosystem’s existence.

Is It Really So Bad?

In a word. Yes. 

Wedbush Securities analyst Dan Ives is very bullish on Apple stock. He currently has an Outperform rating on the stock with a $250 target price, 46% higher than where it’s currently trading. 

However, the analyst isn’t blind to the lawsuit’s ramifications. As I wrote earlier, he believes it could lead to changes in its “core business model.”  

“The key part of the DOJ case will likely argue that Apple unfairly penalizes competitors and tech rivals by blocking other tech players from accessing hardware and software features of its flagship iPhone,” Business Insider reported Ives’ comments from his note to clients. 

This could also be bad news for some of Apple’s Magnificent Seven rivals as the Biden Administration increases its regulatory crackdown. 

Apple shareholders can be sure that the company will fight this lawsuit with every tool at its disposal. It’s been fighting the DOJ for years. The only difference this time is that it’s going after the golden goose, Apple’s business model.

Ives believes that Apple will ultimately have to settle. That likely means a hefty fine (larger than $2 billion) and some changes to the App Store to appease developers. 

Like many things, taking its medicine won’t be as bad as some might fear. You have a worst-case, a best-case, and a most likely. Ives is betting on somewhere in the middle.

Should You Sell Apple Stock?

I don’t think there’s any question that Apple stock could fall further as the ramifications become clearer. However, this will take several years to play out. 

Unless you feel that Apple’s current business isn’t performing up to snuff — the cancellation of the Apple Car project was a big failure to execute — Apple’s valuation is reasonable, if not cheap, with a free cash yield of 3.9% based on an enterprise value of $2.75 trillion. I would not sell, putting aside some dry powder should it fall again. 

If you don’t own AAPL stock, I would seriously consider buying Berkshire stock as a side-door way to own the iPhone maker’s stock. It provides greater downside protection should the DOJ lawsuit become a worst-case scenario.    

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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