Apple's potential tie-up with Perplexity seen as defensive move amid Google antitrust case – Jefferies

Apple is reportedly considering a partnership or acquisition of AI startup Perplexity, a move Jefferies analysts interpret as a defensive strategy against potential fallout from the Google antitrust case. This case threatens Apple's lucrative $20-25 billion annual default search agreement with Google, which accounts for 18% of Apple's operating profit. While aiming to enhance AI capabilities, Jefferies notes the financial impact of a $14 billion deal would be minimal and benefits unclear, reflecting Apple's 'underwhelming' AI progress and historical integration challenges.

Analysis

A potential partnership or acquisition of AI startup Perplexity by Apple Inc. is being interpreted by Jefferies as a primarily defensive strategy, rather than a significant offensive move in artificial intelligence. The core driver is the substantial risk to Apple's high-margin revenue stream from Google, which totals an estimated $20-25 billion annually and constitutes up to 18% of Apple's operating profit. This income is threatened by a US Department of Justice antitrust ruling against Google, with potential remedies that could disrupt the default search engine agreement as soon as August 2025. While a $14 billion acquisition of Perplexity would be Apple's largest to date, its financial impact is projected to be minimal, with an estimated EPS accretion of less than $0.10, or 1% of FY25 forecasts. Jefferies highlights significant execution risks, citing Apple's historical challenges in integrating large acquisitions like Beats and the Intel modem business, as well as reputational concerns over Perplexity's alleged unauthorized content usage. Consequently, the move is viewed not as a positive catalyst but as a necessary hedge against regulatory fallout, underscored by what analysts term Apple's 'underwhelming' progress in AI.

Key Decisions for Investors

• Investors should primarily view a potential Perplexity deal as a risk mitigation tactic against the potential loss of a significant, high-margin revenue stream from Google, not as a sign of aggressive AI innovation.
• The outcome of the Google antitrust case, with remedies expected by August 2025, represents a critical near-term event for Apple's profitability and should be monitored closely.
• Factor in significant execution and reputational risks associated with a potential acquisition, given it would be Apple's largest ever deal and the firm has a mixed track record with large-scale integrations.
• Do not price in any meaningful near-term earnings accretion from a Perplexity deal, as its financial impact is expected to be negligible relative to the core business and the larger Google revenue risk.