Who Is Going To Cash the Microsoft-Google AI Search Rivalry? Analyst Says Apple

BofA analyst Wamsi Mohan maintains a Neutral rating on Apple Inc AAPL with a price target of 168.00.

Alphabet Inc GOOG GOOGL Google has been the dominant search option (especially across mobile). A recent media report noted that Samsung Electronics Co, Ltd SSNLF is considering changing the default search from Google to Microsoft Corp MSFT Bing. 

The switch from Google to Microsoft is relevant to Apple as Mohan estimates that Google pays Apple ~$20 billion for being the default search engine across iOS devices, the analyst mentions in a Tuesday note titled "Can Apple be the beneficiary of the AI search wars?" 

Apple has a revenue share agreement with Google, paying Apple a percentage of mobile traffic acquisition costs (TACs). Apple could re-negotiate with Google for better terms or consider switching to Microsoft when the agreement expires. 

Renegotiation would involve getting a higher amount per search. Mohan estimates that Apple already gets around 80% of TAC to distribution partners.

The rise of Microsoft as a potential alternative to Google gives Apple more bargaining power to monetize an attractive installed base of over 2 billion Apple devices. 

Interestingly, Apple has had a longstanding relationship with Google that has delivered an attractive low-risk revenue and profit stream for Apple. Switching to Microsoft with revenue share economics is not without risk. 

If users continue to choose Google over Microsoft (changing the default search option to Google from Microsoft), the volume of searches for which Apple gets paid will decline. A higher rate per search might not offset the share loss in aggregate search. 

Further, if Google can monetize the search at a much higher level, it could be challenging for Microsoft to compete for the contract (margin loss near term vs. a view of a strategic long term)

The Department of Justice (DOJ) actively investigates Google's potential monopoly on mobile search. Ironically, the rise of Microsoft as a credible alternative and the fact that Samsung might switch from Google to Microsoft creates a marginally more challenging case to establish Google's monopoly on mobile search. 

If the DOJ were to drop this investigation, the analyst would view it as net favorable for Apple as it removes a tail risk of high margin payments getting compromised.

Price Action: AAPL shares traded higher by 0.87% at $166.67 on the last check Tuesday.

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