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Investing.com -- Apple’s Services division, long considered a pillar of stability, has recently been facing heightened scrutiny from investors amid legal, competitive, and regulatory challenges that could undermine its growth profile and premium valuation.

According to Morgan Stanley (NYSE:MS), the April 30 injunction tied to the App Store and comments made by Apple (NASDAQ:AAPL) Services head Eddy Cue during U.S. v. Google (NASDAQ:GOOGL) proceedings have "supercharged" concerns about the segment.

Cue revealed that traditional search volumes in Safari declined year-on-year in April for the first time in over two decades, attributing the drop to growing consumer interest in AI search competitors.

His comments that he is “losing sleep over the possibility of losing the Apple revenue share with Google” were a notable admission of the stakes involved.

The pressure comes as digital advertising — largely driven by Google’s traffic acquisition cost (TAC) payments — and App Store revenues, which together make up Apple’s most profitable Services lines, confront unprecedented risk.

“When combined with the recent U.S. App Store injunction, up to 60% of Apple’s Services revenue is ’at risk’,” said Morgan Stanley analyst Erik W. Woodring in a note. He adds that App Store and Google TAC have been instrumental in expanding Services margins from 60.8% in fiscal 2018 (FY18) to 75.4% in the first half of FY25.

Morgan Stanley acknowledges both sides of the investor debate. On one hand, the market may be “over-extrapolating one data point.” While digital ads are projected to grow just 3% year-on-year in the June quarter, that figure is expected to rebound to over 5% in the September quarter.

Moreover, Apple’s large base of high-income users and device control still makes it an essential partner for any general search engine or AI platform.

“Even if search habits change over time, Apple is still gatekeeper, and will still find ways to monetize search at the same (or higher) rate as it does now,” the report said.

Still, uncertainty remains a valuation headwind. With Google TAC contributing around 13% of Apple’s total EPS, the risk of erosion is significant. Morgan Stanley questions whether “a company’s valuation multiple is based on growth and predictability” can remain elevated if more than 20% of earnings are under threat.

The bank’s analysts believe these concerns could cap the stock’s multiple until more clarity emerges from upcoming catalysts such as WWDC, the iPhone 17 launch, and June quarter earnings.

“Near-term multiple upside is likely capped until we get to June quarter earnings (at the very earliest) to better understand how digital advertising performed in the quarter,” Woodring said. “But even beyond next earnings, we now see the potential for investors to more rigorously debate what has previously been undebated – does Services growth face secular risk?”

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