When Apple (AAPL -1.14%) recently reported its fiscal second-quarter results, it highlighted both the positives the company is seeing and the challenges it is facing. With the stock down around 20% this year, as of this writing, Apple has lost its mantle as the world's largest company to rival Microsoft.

Let's examine if the positives for Apple outweigh the risks, or if investors should move on to better ideas.

Legal and tariff risks

While at its core Apple is a hardware company, it is the company's high-margin services segment that has been its biggest growth driver over the past few years, as iPhone sales have generally flattened out over time. The services segment generates revenue in a variety of ways, including through its App Store, cloud storage, subscriptions like Apple TV, Apple Pay, and its revenue-share agreement with Alphabet's Google for search.

Services revenue once again led the way for Apple, rising 12% to $24.97 billion, but that fell short of the $25.28 billion analyst consensus, as compiled by LSEG. Meanwhile, there are mounting concerns about how the legal landscape could impact Apple's services business.

On Apple's earnings call, an analyst brought up the recent injunction Epic Games won against the company, as well as the potential impact of Google's antitrust lawsuit. Regarding the Epic case, a judge ruled that Apple had willfully violated a court ruling and continued to interfere with competition. The company could face criminal contempt charges for its actions.

The biggest overhang, however, is what happens concerning its exclusive search deal with Google. Apple is generating more than $20 billion a year in revenue from the deal, which is pure profit. That represents more than 15% of its operating income. The stakes in the case are high for Apple, and it was denied earlier this year from taking a limited role in the remedies phase of the proceedings.

Tariffs, meanwhile, were front and center. The company said tariffs had a limited impact on its results for its March quarter. However, Apple estimated that if there were no further changes that tariffs would increase its costs by $900 million in the June quarter. However, it added that certain unique factors benefited the June quarter. It has been reported that consumers were rushing to Apple stores to buy iPhones and other Apple products in early April ahead of the tariffs and that the company had been stockpiling inventory ahead of time. As such, the impact after the June quarter would likely be worse if everything remains the same.

However, Apple noted that for the majority of iPhones sold in the U.S. in the June quarter India will be listed as their country of origin, while for the rest of its products, most will come from Vietnam. It noted that for products sold in other countries that their main source of origin will be China.

China, meanwhile, continues to be an area of weakness for Apple, with sales in the country down 2%. However, that was an improvement from recent quarters, including the December quarter when sales fell 11% in China.

Overall, though, Apple turned in a solid quarter. Revenue rose by 5% to $95.4 billion, while its earnings per share (EPS) climbed 8% to $1.65. That topped analyst expectations for EPS of $1.60 on sales of $94.58 billion, as compiled by LSEG.

Product segment sales rose nearly 3%, driven by strong iPad and Mac sales. iPad sales climbed 15% to $6.4 billion, powered by sales of the new iPad Air. Mac sales increased 7% year over year to $7.9 billion, helped by new updates to Apple's laptop lineup. Wearable sales fell by 5% to $7.5 billion, as it faced a tough comparison to a year ago due to the launch of the Apple Vision Pro in the year-ago quarter as well as the Watch Ultra 2.

All-important iPhone sales, meanwhile, rose 2% to $46.8 billion. The company said that iPhone upgraders grew double-digits year over year. It added that the iPhone was a top-selling model in the U.S., urban China, the U.K., Germany, Australia, and Japan.

Image source: Getty Images.

Risk vs. reward

Apple continues to put up solid overall results, led by its high-margin services segment. Meanwhile, iPhone and other device sales remain steady. However, the company does face some increasing risks.

While tariffs will have a moderate impact in the June quarter, their effect could intensify thereafter. However, the company has moved manufacturing away from China and will look to source more chips from the U.S. It also plans to invest $500 billion over the next four years in the U.S., including opening a new advanced server manufacturing facility in Texas.

The bigger risk is what happens to its lucrative Google-search revenue-sharing agreement. While all of this revenue is likely not going to go away, if a meaningful portion does, it will be a significant blow to the company's earnings.

The stock trades at a forward price-to-earnings (P/E) ratio of around 28 based on fiscal 2025 analyst estimates. That multiple is relatively high for a company with modest revenue and EPS growth.

Throw in the risk that Apple could see a significant portion of its operating income disappear, and I think the risks outweigh the reward with the stock, even after its pullback this year.