Lawsuit Drama Doesn't Change Our View of Apple Stock

Apple shares were off more than 3% in trading on Thursday, but Morningstar analysts are unconcerned, arguing time is on the company's side.

William Kerwin 22 March, 2024 | 11:16AM
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The U.S. Department of Justice is pursuing Apple in an anti-trust lawsuit that challenges the company's ability to keep its competitors outside its existing product and customer 'ecosystem'. Among other things, it is alleged Apple's business practices give it an unfair advantage and help to "stifle" broader market innovation. Apple vigorously opposes the suit and says it has done nothing wrong. In light of the news, Morningstar analysts have re-assessed the case for Apple, but explain below that very little in their thinking has changed

We maintain our US$160 fair value estimate for Wide-Moat technology giant Apple (AAPL), and keep its Medium Uncertainty Rating after the company was hit with an anti-trust suit from the U.S. Department of Justice.

We are unsurprised by the suit, which has been rumoured for months and follows similar actions against other large technology firms like Alphabet (GOOGL). We don"t foresee the suit resulting in a significant demolition of Apple's business or Moat.

In our base case, we assume the suit will result in some opening of Apple's walled garden ecosystem, similar to what we expect from the European Union's Digital Markets Act. We still believe most Apple users opt into the firm's premium closed ecosystem, and we don't predict significant attrition for the firm's products and services even in a more open environment. The company's shares dipped more than 3% during trading yesterday, a stark difference from other technology stocks' positive performance. We see Apple as fairly valued.

Key Morningstar Metrics for Apple

• Fair Value Estimate: US$160.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

The suit is wide-ranging, mentioning the App Store, Apple Pay, iMessage, and the Apple Watch. It appears to target Apple's core strategy of wrapping customers into its iPhone ecosystem with auxiliary products and services. We could reasonably foresee Apple opening portions of this ecosystem – allowing third-party payment services, for example – and it has already planned to move to a more interoperable messaging standard.

We don't model a massive impact from the suit. We believe users will generally continue to choose Apple's easy-to-use ecosystem, even against more-widely-available alternatives. We also expect the suit to take years to bear out, with the additional possibility of a new US presidential administration changing the priorities of litigators.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Apple Inc213.86 USD-1.30Rating

About Author

William Kerwin  

is an equity analyst on the technology team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar Inc. He covers the IT supply chain, hardware, and semiconductor stocks.

Before joining the firm full-time in 2019, Kerwin was an intern on Morningstar's basic materials team.

Kerwin holds a Bachelor of Science in economics with a math emphasis and French from the University of Wisconsin-Madison. He also holds the Chartered Financial Analyst® designation.

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