Carl Icahn and Apple
Activist investor Carl Icahn revealed this week that he had bought $1 billion more shares in Apple (AAPL) over the past two weeks, increasing his stake in the iPhone maker to $3.6 billion. Icahn also put out a seven-page letter to AAPL shareholders discussing why the company should boost its share buyback program. In the letter, he summarized why Apple is undervalued and urged the board to consider a $50 billion share repurchase over the course of fiscal year 2014.
In the letter that was posted on the SEC website, Icahn wrote:
- “In our opinion, a great example of a ‘no brainer’ in today’s market is Apple. The S&P 500’s price to earnings multiple is 71% higher than Apple’s, and if Apple were simply valued at the same multiple, its share price would be $840, which is 52% higher than its current price.”
He further explained:
- “The company has recommended voting against our proposal (for share buyback) for various reasons. It seems to us that the basis of its argument against our proposal is that the company believes, because of the ‘dynamic competitive landscape’ and because its ‘rapid pace of innovation require[s] unprecedented investment, flexibility and access to resources,’ it does not currently have enough excess liquidity to increase the size of its repurchase program.”
Icahn also called Apple “perhaps the most overcapitalized company in corporate history,” considering that the company “had $130 billion of net cash as of September 28, 2013, and that consensus earnings are expected to be almost $40 billion next year.”
Icahn said that Apple has a tremendous growth opportunity going forward, given that the iPhone maker has a loyal and growing customer base. He wrote:
- “The industry (smartphones and tablets) is expected to grow volume at a 15% compounded annual growth rate from 2013 through 2017 according to IDC. We believe Apple should continue to benefit from this secular growth, as last year, 85% of Apple’s revenues came from smartphones, tablets, and related software, services, and accessories. The naysayers question whether Apple will be able to participate in this growth without sacrificing pricing and gross margins, especially with competition from Google, Samsung, Microsoft, Amazon and Chinese manufacturers. Our response to them is that the answer is already evident to us from the continuing loyalty of Apple’s growing customer base. The highly successful evolutionary (not revolutionary) introductions of the iPhone 5s and 5c and iPad Air and Mini, prove to us that Apple could, for the most part, maintain pricing and gross margin as we believe consumers are willing to pay a reasonable premium for the world’s best smartphones and tablets.”
Icahn further noted that “Apple clearly has an impressive track record of such new category product introductions, even if it does so rarely.” He wrote that Apple CEO “Tim Cook’s comments on introducing new products in new categories, along with advancements in enabling technologies, lead us to believe that we may see in the not too distant future what new groundbreaking products they’ve been working on developing in Cupertino these last several years.”
He added that a $1,600, ultra-high–definition Apple TV set as a debut could generate $40 billion in annual revenues and $15 billion in operating income at a gross margin of 37.7%. Apple also has a “compelling” opportunity in developing a smartwatch. “With the fingerprint sensor, iBeacon, 575+ million credit card numbers stored in iTunes, and Apple’s homogeneous iOS installed base with 79% of devices using iOS 7, we believe a revolutionary payments solution is now a very real opportunity that the company could choose to pursue,” the letter said.
On possible arguments that Apple needs to maintain its excess liquidity to increase R&D or make acquisitions, Icahn noted, “With respect to possible M&A (to which the company does not refer in its statement), for the opportunities highlighted above (a TV, a watch, a payment service), we find it extremely difficult to identify any possible strategic acquisitions of scale that make sense. ” He added, “Apple clearly has a long history and culture of developing its innovation internally, which leads us to believe that the company will not seek out large acquisitions to pursue any of the opportunities about which we have speculated. ”
Icahn expects that if his proposal receives majority approval, the board will increase the repurchase program as requested to enhance value for all long-term shareholders.
According to previous news reports, Icahn had pushed for a $150 billion buyback last year, but the amount has been scaled back to $50 billion and will be voted upon by shareholders at the annual meeting next month. Icahn had first disclosed a significant stake in Apple in August last year. The company is poised to report its 1Q 2014 results on Monday.
To see how Apple is faring versus its peer, Microsoft (MSFT), see Analysis: Is Microsoft’s stock performing well versus its peers?