Why Apple Stock Jumped on Alphabet's Big Day -- and Why Investors Should Care

Key Points

• Apple's search-deal tail risk eased after the court let default search engine payments continue this week, supporting the durability of the iPhone-maker's important services segment.

• Tim Cook had flagged on the Q3 call that Apple's outlook assumed the Google revenue-share agreement continues.

• With a premium valuation multiple for the stock already in place, future returns lean on sustained services growth and execution as regulatory details evolve.

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Apple (NASDAQ: AAPL) stock rose several percent earlier this week, after a federal judge issued remedies in the government's search antitrust case against Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google that stop short of breaking up core search and advertising-related assets or banning Google's default search engine deals. The ruling, for instance, leaves intact the multibillion-dollar arrangement that makes Google the default on Apple devices -- a high-margin revenue stream that investors in the iPhone-maker have worried could be curtailed.

The market's read-through was simple: Alphabet's win reduces uncertainty for Apple, which reportedly receives around tens of billions of dollars annually from Alphabet to keep Google Search as the default on Safari. Those traffic-acquisition payments have long been a quiet but meaningful contributor to Apple's Services economics, so clarity on their continuation helps sentiment toward the stock.

For context, Alphabet shares also rose on the news, underscoring how central these agreements are across the ecosystem.

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Apple investors can now pivot from "Will the deal be killed?" to "What does Apple's business look like with the deal preserved?"

Image source: Getty Images.

Adding to Apple's momentum

This news just adds to a growing bull case for Apple stock.

The tech company's most recent quarter -- fiscal Q3 -- was solid. Revenue rose 10% to $94 billion and earnings per share (EPS) increased 12% to $1.57 -- both June-quarter records. Capturing some of the quarter's key catalysts, Apple's services revenue reached an all-time high and iPhone posted double-digit growth.

With this legal overhang behind the company, investors can begin giving more weight to Apple's financial momentum in their analysis. The concern was big enough that it even came up in Apple's most recent earnings call. CEO Tim Cook explicitly conditioned Apple's forward-looking "color" on assumptions that "the current revenue-share agreement with Google continues." That's unusually direct language for Apple, indicating the deal's materiality to near-term planning.

Investors don't need to model precise dollars to grasp the takeaway: the high-margin engine just avoided a forced reset. Apple's services business mix boasts higher margins than its hardware sales, so preserving the Google payments stabilizes a line item that helps EPS compounding. For the nine months ended June 28, for instance, Apple's services gross margin was 75% -- more than twice its hardware gross margin of 37%.

Why this week's ruling matters from here

Near-term, the decision removes a key bear argument around Apple's services segment's durability. If you believed a ban on default payments would hit high-margin revenue and compress the multiple, that tail risk just faded. Wedbush called the outcome a "monster win" for Apple and a "home run" for Google -- language that captures why both stocks rallied, even if investors should still track any negotiated tweaks that emerge.

Of course, with Apple stock rising sharply in recent weeks, valuation is more of a concern. Apple trades at a premium on trailing earnings -- about 36 times earnings as of this writing -- which means upside depends more on execution than multiple expansion from here. However, with the company's iPhone and services segments growing nicely, a clean balance sheet, and steady capital returns, shares still look attractive. But the market will need to see continued momentum in Apple's important services business.

The bigger picture for long-term holders is straightforward. This week's ruling kept a high-margin revenue source intact and aligned with what management had assumed on the third-quarter earnings call, reinforcing the base case for EPS growth. There are still risks. Appeal risk and Google's new data-sharing requirements, for instance, add some noise. But Apple now faces that future with one less black cloud and with fundamentals doing their part.

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Daniel Sparks and his clients have positions in Apple. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.