Apple's Services Division Under Pressure from Legal and AI Disruption

Legal Ruling and AI Search Competition

• On April 30, a U.S. injunction targeting App Store rules threatens up to 60% of Services revenue tied to in-app purchases.

• Eddy Cue revealed Safari's traditional search volume fell year-over-year for the first time in over two decades, as users explore AI alternatives like Bing AI and ChatGPT.

• Rising AI search contenders put both Google TAC payments and App Store fees at risk.

Services Revenue Breakdown and Margin Trends

Apple's Services segment—once prized for its stability—now faces potential headwinds:

• High-margin streams: App Store commissions and Google's traffic-acquisition costs drove Services margins from 60.8% in FY 18 to 75.4% in H1 FY 25.

• Segment exposure: Up to 60% of revenue depends on these two lines.

• Revenue mix: Investors can monitor the latest Services vs. hardware split via the Revenue Product Segmentation API.

Valuation and Risk Scenarios

• Earnings multiples: Apple trades at a premium reflecting Services growth. A forced re-rating could compress those multiples.

• Profitability metrics: Track real-time margin changes and operating ratios with the Key Metrics (TTM) API.

• Scenario analysis: Model earnings impact under varying App Store and search-revenue outcomes to quantify downside.

Watchpoints for Investors

1. App Store appeal decision: Clarifies revenue continuity.

2. Safari search-share updates: Signals consumer shift toward AI search.

3. Q3 Services guidance: Reveals whether digital-ad growth materializes as projected.

Staying on top of segment revenue shifts and margin metrics will be crucial to gauge whether Apple's Services arm remains a durable growth driver or faces prolonged investor skepticism.