Why Carl Icahn thinks Apple stock is dramatically undervalued

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Carl Icahn believes that Apple’s stock should trade at around $203

In the previous part of this series, we discussed how Carl Icahn led a proxy war against eBay (EBAY) to spin off PayPal. He was successful in his efforts, which shows his stature as an activist investor. Now, in a recent statement, Icahn says he believes that Apple’s stock is dramatically undervalued and is actually trading at half of its intrinsic value. He believes that Apple’s (AAPL) stock should be trading at around $203—much higher than the current stock price of $98.

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In his note, the rationale that Icahn gave for Apple’s stock undervaluation was that the iPhone will continue to hold a significant market share in the premium smartphone segment and it will continue to retain its loyal customers. He’s also bullish about Apple’s new services such as Apple Pay and Apple Watch.

Apple Cash Balance _Q2 2014

Icahn wants Apple to become even more aggressive in its stock repurchase program

Icahn is now urging Apple to buy back its stock at an even more aggressive pace to make use of the opportunity. Earlier this year, he tweeted on Twitter (TWTR) that Apple wasn’t doing enough when it came to its share buyback program. But Apple has actually been aggressively pursuing stock repurchases.

By the end of fiscal 3Q14, Apple had already taken action on $74 billion of the $130 billion capital return program, including $51 billion in share repurchases. Despite this huge stock repurchase, Apple still had cash and cash equivalents of $164 billion by the end of fiscal Q3, as the chart above shows. This is why Carl Icahn is urging Apple to repurchase its own shares even more aggressively in order to make judicious use of its cash balance.

If Carl Icahn’s prediction for Apple’s stock price prospects turns out to be true, it will not only be good news for Apple’s investors but also for exchange-traded funds (or ETFs) like the Technology Select Sector SPDR (XLK), the PowerShares QQQ Trust (QQQ), and the iShares U.S. Technology ETF (IYW), which have high exposure to Apple.

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