Apple faces 'headline risk' from regulators, not fundamental risk

Apple (AAPL) faces regulatory pressures after reports of several investigations, from an antitrust lawsuit brought on by the US Department of Justice (DOJ) to the European Union's (EU) probe into Big Tech players.

Evercore ISI Analyst Amit Daryanani — who has an Outperform rating on the stock with a price target of $220 per share — joins Yahoo Finance Live to discuss how Apple could potentially recover and get unstuck from the rock-and a-hard place the iPhone maker finds itself in the middle of.

Daryanani notes that the EU probe poses "more headline risk than fundamental risk," stating that he doesn't believe it has "a material impact" on Apple. However, he suggests that how "elements in the US play out" will have a more substantial financial impact on Apple, as investors await the fallout from the DOJ investigation and the broader implications of Apple's AI partnership with Alphabet (GOOG, GOOGL).

Regarding Apple's stock underperformance, Daryanani attributes it to the fact that the company is not being perceived as "an AI story." He anticipates that at its upcoming WWDC 2024 conference, Apple will likely discuss the inclusion of Google's Gemini AI on iPhones and how AI can enhance the iPhone experience, which could serve as a good "value [proposition]" for the company's stock.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

JOSH LIPTON: All right, moving on. Here, let's go to the Apple stock-- down nearly 11% so far this year as the tech giant faces several headwinds. The European Union dealing the latest blow as it launches a probe into Apple, Meta, and Alphabet under the new Digital Markets Act. Tech legislation Evercore ISI senior managing director Amit Daryanani here now with more on the uphill battle for Apple.

Ahmed, it is great to see you on the show. Let's just start right there. Apple now in the crosshairs of regulators on both sides of the Atlantic. We'll start with this news from the EU. They're launching this probe, Amit, into big tech including Apple. How worried should Apple investors be about that, Amit? What are you telling your clients?

AMIT DARYANANI: Yeah. Josh, we think both sides of the discussion, be that in the US and Europe, at this point seems to have more noise around it and headline risk versus fundamental risk. Even if you enable things like side loading, for example, which is what the EU is trying to get to, we don't think it has a material impact to Apple at the end of the day.

If you look at the entirety of EU, Apple does about 1.2 billion of services revenues-- of App Store revenues I should say, from the EU. So, even under one of scenarios that goes to 0, it really does not make a big dent to Apple. Let's say the EU App Store business is de minimis for it to have a real impact.

We'll have to see, I think, elements in the US, how they play out will be more material, especially how the Google, Apple relationship is going to get worked out, and what the DOJ comes out on that. I think that's financially is going to be a much more relevant headline announcement than anything else, but a lot of the other stuff we think is more headline risk, more noise versus a fundamental impact to Apple's model.

AKIKO FUJITA: So, let's hone in a bit more on what's been playing out on the US side. I mean, you talked about that partnership with Google. There's obviously concerns about the search side of things. But also as Apple looks to build out their AI capabilities-- that partnership that was reported with Gemini. I mean, how do you think this all plays out when they are under the microscope of the DOJ right now, and what does that ultimately mean on the other side?

AMIT DARYANANI: Yeah, listen, I think all these companies have been under the microscope for an awfully long time, so I think they're going to do what they have to do to ensure the business continues to thrive. You know, I'll take two parts of it, right, listen. Google pays Apple $16 to $20 billion is a range out there for being the default search engine. About 40% of that business is obviously in the US, so the risk if this thing gets completely struck down is someone like Apple could lose 40% of that $16 billion number.

Let's just say it's about $6 billion of revenues, which is high profit margin, could go away, right. Now, there are offsets to that, I would argue. Apple will still get some sort of attack from Google. Maybe it's not all the $6 billion, but there will be some sort of comeback out of it, right. But headline, that's a risk you have-- the Google, Apple default search option goes away.

JOSH LIPTON: And let me ask you, this stock is under pressure obviously-- it was down about 10% so far this year. In part, I think investors are concerned about Tim Cook's AI strategy. What is that strategy, Amit? I mean, do you think we're going to get some big news out of Apple's big software show in June?

AMIT DARYANANI: Listen, our expectation is yes, you'll get some good news around the AI stuff at WWDC. Now, the stock has underperformed, I think, very, very simplistically for the fact that for every dollar that's going into NVIDIA, it's implicitly coming from Apple. It's not quite that easy, but I think, really, it's more positioning and Apple not being an AI story, right.

What we think Apple is going to talk about is almost a 2-step AI narrative, right. What they'll say is, listen, for very GPU intensive things like video editing, image creation, you should use something like Google Gemini, essentially, right. So, they'll have that partnership with Google to do that. For a lot of the simpler text based text based AI uses, if you may, I think what they'll do at WWDC is unlock local inferencing.

And what that effectively would mean is you could actually run smaller LLMs, three to six million parameter LLMs on your iPhone. It's going to be faster, it's going to be cheaper, it's going to be more secure for you to do that. So, we think there's a huge value prop there. And I think that's what Apple is going to talk about. Smaller LLMs on your iPhone, which by the way, could-- we believe will trigger an iPhone supercycle. And for the more complicated stuff, they'll probably offload it to someone like Google Gemini and have a partnership with them.