Proposed Senate Bill Would Affect Alphabet (GOOGL) and Apple (AAPL) App Stores

What is the potential impact for the tech giants?

There's news and then there's news. Search engine/media giant Google hit the headlines earlier this afternoon. The news for Google and its parent company Alphabet Inc. (GOOGL, GOOG) doesn't look good on the surface. The news also affects Apple Inc. (AAPL).

Here's the skinny: both Google and Apple may be forced to allow third-party app stores on their devices. Up until now, if you have an iPhone or iPad and want apps for it, you're forced to go through Apple's app store. Google does offer other app stores, but the company has faced criticism in claims that it deliberately makes it harder to use competitors on Android devices.

Key Takeaways

  • A proposed Senate bill could affect the app stores of Google and Apple.
  • If it passes, the hypothetical revenue impact to the tech behemoths isn't massive.
  • Both stocks have seen Big Money support this year.

It's worth noting that both Apple and Google take a cut of in-app purchases: somewhere between 15% and 30%. CNBC reported in March of this year: "Beginning July 1, Android developers will be charged 15% of the first $1 million in digital sales through the Google Play app store for Android phones. Google takes 30% of sales after that." Those are hefty fees and are quite lucrative too.

While we can't get exact App Store sales figures for Apple, estimates are nothing to sneeze at. In 2020, Apple reported $54.76 billion in "services revenue," which was 20% of its total sales. But App Store fees are just a fraction of Apple's services business, which also comprises warranties and subscriptions like Apple Music, Music Match, iCloud, etc.

Alphabet reported $21.7 billion of "other services" revenue for 2020. But lumped in there is also hardware, YouTube, and other services.

Now a newly introduced Senate bill is aimed at ending their perceived unfair dominance for their app platforms. A few developers such as Epic Games feel that a handful of app developers unfairly own the lion's share of the pot of cash coming in. Anger at that has helped spur the introduction of this new bill.

Investors may want to know if they should worry. It's hard to pin down what the impact might be, but the app store crusade by the senate would definitely affect both Google and Apple's businesses if it passes. It's just not likely to amount to a significant threat because the business segments are still small in the vast landscape of both tech giants' revenue machines.

For perspective, Apple reported revenue of $274.5 billion in 2020, while Alphabet reported $182 billion. Using Apple as an example, I'll hypothesize and say that App Store revenue is 25% of the $55 billion of other services. 

If the new bill caused a material reduction to Apple's revenue and that segment fell by 25%, it would cost Apple $3.4 billion in revenue based on 2020 figures. While $3.4 billion sounds like a lot, that would only affect total revenues by a teensy 1.2%. That's hardly anything to panic about. I summarize my thinking here:

Hypothetical revenue impact to Apple Inc. (AAPL)

*This author's opinions

In my opinion, it's safe to say the Senate bill is aimed at a fraction of a fraction of each of the mammoth businesses.

Time will of course tell, but one way to gauge investor fear is to look at how Big Money investors behave toward a stock. If there continues to be Big Money inflows, one can assume that big investors are just brushing off the news, or even ignoring it altogether. 

One way I analyze this is looking at Big Money trading in the stock. My research looks to identify when there's unusual institutional buying or selling of shares. Let's look at how both Google and Apple have been trading recently and what kind of observations we can make.

First, we see a table of Big Money buying for both stocks sourced from MAPsignals. We can see that there is still healthy appetite for the shares. Here we see Apple's data:

Big Money activity for Apple Inc. (AAPL)

And here we see Alphabet's data:

Big Money activity for Alphabet Inc. (GOOGL)

A big money buy signal indicates that the shares were ramping higher with larger-than-average volumes. That's typically bullish action.

To give you an idea of what outsized trading looks like, check out the following charts. Here's GOOGL. I've flagged many of those Big Money trading signals:

Share price performance of Alphabet Inc. (GOOGL)

Now, let’s look at AAPL:

Share price performance of Apple Inc. (AAPL)

Apple's chart has been more volatile than Alphabet's. You can see that shares came under pressure, triggering selling back in March.

The near-term picture is healthy for both stocks. And the longer-term picture is even stronger, with both stocks up triple digits the past few years.

I believe that the latest headlines are just fuel for thought and will ultimately serve as a distraction. Alphabet and Apple have built moat-style businesses, and some are unhappy about that. I'd bet that, in the long run, the companies will continue climbing. 

The Bottom Line

The Senate bill that has been introduced hasn't passed. If it does, it will take time to affect the bottom lines of Alphabet and Apple. And if that should eventually come to pass, the impact will likely be nominal, in my opinion. This ultimately means that investors should not worry about these lower-level distractions. If there is selling in reaction to news like this, I'd view it as an opportunity for long-term investors.

Disclosure: At the time of publication, the author holds no position in AAPL but holds long positions in GOOGL in personal and managed accounts.

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