Court Ruling Threatens Apple's App Store Fees, Amplifying Overvaluation Risks

What happened

A federal appeals court has ruled in Epic Games' favor, with its CEO declaring this the end of Apple's app store commissions, often dubbed the 'Apple tax.' Apple's Services segment, which reported $109 billion in FY25 revenue with 75% gross margins, is a cornerstone of its profitability and supports its premium valuation. This legal outcome directly challenges those margins by potentially forcing Apple to lower or bypass fees on in-app payments, as highlighted in regulatory risks within recent SEC filings. The DeepValue report already identifies such regulatory pressures as a key threat, noting the stock trades at a 165% premium to a conservative intrinsic value estimate. Thus, this development intensifies existing concerns by targeting Apple's most lucrative and defensible revenue stream.

Implication

The court ruling increases the near-term probability of reduced app store fees, which could directly erode Apple's high-margin Services revenue, a segment critical for sustaining its premium multiples. With Services contributing 75% gross margins versus 37% for Products, even modest fee cuts might significantly impact overall profitability and cash flow generation. This aligns with the DeepValue report's warning that regulatory actions, including DMA remedies, could undermine the Services thesis, a core driver of Apple's economic moat and stock price. Given the stock's rich valuation at ~37x P/E, any material slowdown in Services growth or margin decline could trigger a re-rating, exacerbating downside risk in an already overvalued scenario. Therefore, investors should closely monitor upcoming quarterly reports for signs of fee compression and consider reducing exposure unless new growth catalysts, like AI adoption, clearly offset these pressures.

Thesis delta

The news strengthens the 'POTENTIAL SELL' thesis by adding a tangible regulatory setback that could accelerate margin pressure in Apple's high-margin Services business. It underscores that overvaluation risks are now more immediate, as fee reductions may materialize faster than previously modeled, though the core thesis of limited margin of safety remains unchanged.