Yesterday afternoon, the Supreme Court upheld a lower court’s ruling, allowing an antitrust lawsuit against Apple (NASDAQ:AAPL) to proceed. The Supreme Court’s decision means consumers can proceed with a lawsuit that claims the App Store is a monopoly, and Apple’s 30% cut of app fees results in inflated prices. Adding to AAPL’s woes, the trade war with China is escalating, and this time Apple products are in the crosshairs. The market reaction to the Supreme Court ruling and the renewed threat of the trade war with China was swift: Apple stock dropped nearly 6% by close.
With iPhone sales slumping, Apple has increasingly focused on its Services division for revenue growth. In its latest quarterly earnings, AAPL reported Services revenue hit a new all-time high of $11 billion. Services include Apple Music, Apple Pay and others, but the App Store is a big part of that.
Apple announced in January that in the few days between Christmas Eve and New Year’s Eve, customers had spent $1.22 billion on App Store purchases. Since 2008, they have spent $120 billion. And Apple takes a 30% cut of those sales.
That’s the focus of a lawsuit that has been filed against the company. The claim is that the App Store is a monopoly, since Apple prevents iPhone and iPad users from downloading apps from anywhere else. Therefore, the 30% cut Apple takes results in consumers paying inflated prices for apps. The lawsuit has been ongoing for nearly a decade, but on Monday the Supreme Court ruled that it can proceed. Should Apple ultimately lose the case, that would likely mean big penalties in addition to that 30% cut being in jeopardy.
Having the Supreme Court rule against AAPL and allow the lawsuit to continue was enough to spook investors, and hit Apple stock.
Trouble In and With China
Apple’s Monday didn’t stop with the App Store lawsuit headache. It got worse. The trade war between China and the U.S. has been escalating in recent days. On Monday, China announced it will raise tariffs on some U.S. products in retaliation for President Trump’s threats last week to increase the tariffs on Chinese imports.
AAPL is truly caught in the middle of this fight. The company’s most important product — the iPhone — is primarily assembled in China. And Apple also sells products in China. In Q2, the Chinese market accounted for 17.6% of AAPL revenue.
In the early stages of the trade war between China and the U.S., Apple escaped relatively unscathed. The worsening conditions mean that AAPL could be hit on two fronts. Chinese consumers could buy fewer Apple products, and at the same time, tariffs could begin to hit Apple in America. A Morgan Stanley analyst calculated that new tariffs could add $160 to the price of the iPhone XS … or force AAPL to eat that additional cost, significantly cutting into earnings.
Unless cooler heads prevail, the trade war with China is nothing but downside for Apple stock.
App Store Lawsuit + China = Big Trouble for Apple Stock
While the Supreme Court ruling isn’t an actual verdict and there’s a good chance that AAPL will still win the case, the potential to trip up Services revenue is worrying to investors. News that the U.S. trade war with China is escalating and that AAPL may not avoid getting caught in the crossfire this time is also cause for concern. Combined, the two factors resulted in a very bad Monday for AAPL investors with a 5.81% loss on the day for Apple stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.