Activist investor Carl Icahn stepped up his pressure on Apple and company CEO Tim Cook to increase share buybacks. In an open letter designed as much to influence investors as Apple's management, Mr. Icahn made the argument that Apple's stock is worth US$240 share today—almost twice Monday's closing price—based on his believe that Apple will dominate the television market in 2016 and the automobile industry by 2020.
"After reflecting upon Apple’s tremendous success," Mr. Icahn wrote, "we now believe Apple shares are worth $240 today. Apple is poised to enter and in our view dominate two new categories (the television next year and the automobile by 2020) with a combined addressable market of $2.2 trillion, a view investors don’t appear to factor into their valuation at all."
An Apple television has been in the rumor mill for years. Many years. But Apple hasn't actually announced anything. In addition, there is zero chance that Apple's management has shared its product plans with Mr. Icahn. Apple is also known to be working on a car, but the idea that Apple will "dominate" the auto industry is...curious.
Mr. Icahn also took credit for Apple's existing shareholder buyback program, saying, "We are pleased that Apple has directionally followed our advice and repurchased $80 billion of its shares (yielding the company’s shareholders an excellent return), but the company’s enormous net cash position continues to grow while the company’s shares are still dramatically undervalued. With Apple’s shares trading for just $128.77 per share versus our valuation of $240 per share, now is the time for a much larger buyback."
In other words, Mr. Icahn wants Apple to step it up even more. To bolster his argument, he assigned an 18X price-to-earnings (P/E) multiplier and the tax rate of 20 percent he thinks Apple should be using rather than the 26.6 percent "effective tax rate" Apple claims.
Because in Carl Icahn's world, he can do that.
"Apple has clearly demonstrated a track record of excellence and success when entering new categories," Mr. Icahn wrote in his conclusion. "We expect this to continue with the Apple Watch, the television, and the car, and the world will look back on today’s undervaluation as a fascinating example of market inefficiency (and likewise on our valuation at 18x earnings per share as conservative)."
Mr. ICahn might be right in his sentiment, but how he gets there is convoluted and fraught with vagaries he asserts as fact. More to the point, he asserts his assessment of his interpretation of this reality as superior to that of Apple's management, even while praising Apple's management.
Feel free to read the whole thing at Shareholders Square Table.
Shares of $AAPL closed higher Monday, ending the day at $130.19, a gain of $1.42 (+1.10 percent), on strong volume of 50.9 million shares trading hands.
*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.