Yahoo Finance

Key Points

• Apple depends on a huge payment from Alphabet to make Google the default search engine on its products.

• Apple's executives are worried about losing that revenue.

• Apple's stock is already priced for perfection.

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Apple (NASDAQ: AAPL) is one of the world's most profitable companies. It earns most of its profits from sales of various devices and services, but one profit source is more lucrative than any other: The money that Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) paid Apple to ensure that its search engine is the default choice for iPhones.

Alphabet paid Apple $20 billion in 2022 for this commitment, but there is no public information about that payment in the following years. However, it's significant enough that Apple's vice president of services, Eddy Cue, recently said in a testimony to federal court that he "loses sleep" over the thought of losing that revenue.

Because this revenue doesn't cost Apple anything, there's a high probability that this $20 billion or so payment goes directly toward Apple's bottom line. Apple's stock could be primed for a crash if this profit source disappeared.

Apple could struggle if it loses a critical profit source

Cue was testifying in federal court regarding the ongoing Google search engine illegal monopoly case. Alphabet's $20 billion payment was a huge part of this case, described as exercising its dominance and size to ensure others couldn't take its spot as the top search engine option.

While investors still don't know how the companies' relationship will play out, Cue mentioned that he believes that AI-powered search will eventually replace the traditional type of search that Google operates. As a result, it may not be worth it for Alphabet to pay Apple the $20 billion or so anyway.

So, whether traditional search engines are eventually eliminated or Alphabet is barred from paying Apple to be the default search engine, the $20 billion payment is in jeopardy.

Again, this is likely pure profit for Apple. But how much would it cost Apple if it disappeared? Quite a lot.

Over the past three years, Apple's trailing 12-month net income has essentially hovered at or slightly below the $100 billion mark.

So, if Apple were to lose that lucrative payment from Alphabet, Apple's net income would likely drop around 20%. Because Apple is a fully mature company where investors are mostly focused on profits, that drop would likely coincide with a similar level of stock price drop.

A quick 20% drop would likely prompt investors to label it a "crash," so this is a reality that Apple investors must address. However, there's another danger that Apple shareholders face.