Carl Icahn says Apple should buy more of its 'dramatically undervalued' stock, reveals valuation of
Activist investor Carl Icahn published an open letter to Apple CEO Tim Cook on Thursday, revealing that he thinks shares of the company are "dramatically undervalued," presenting it with an opportunity to buy back even more of its own shares at a tremendous discount via a tender offer.
Icahn's new note, entitled "Sale: Apple Shares at Half Price," was published to his website Shareholders' Square Table. As the title reflects, Icahn believes that shares of AAPL stock are currently trading at half of their actual value.
Specifically, Icahn said his forecasted growth for fiscal year 2016 and 2017, along with net cash, values Apple stock at $203 per share today.
As of the end of last quarter, Apple had $133 billion in net cash, which Icahn called an "excessive liquidity." Given its cash position and the current share price, he believes Cook should ask the Apple Board of Directors to "accelerate and increase the magnitude of share repurchases" through a tender offer.
"We commit to this because we believe Apple remains dramatically undervalued," Icahn wrote. "And we think you and the Board agree. If you did not, you would not continue to repurchase shares under the existing authorization. You have said before that the company likes to be "opportunistic" when repurchasing shares and we appreciate that. With this letter we simply hope to express to you that now is a very opportunistic time to do so."
In his note, Icahn goes into great detail about how he believes the iPhone will continue to hold "significant premium market share," and that Apple's high retention rates will keep customers coming back. He also has high hopes for future products and services, such as the Apple Watch and Apple Pay.
"These new launches will further distance Apple's ecosystem from its peers and accelerate revenue and earnings growth in excess of the status quo," he said.
Icahn's forecasts assume that Apple will continue to repurchase its own stock at a rate of $25 billion per year. But he hopes the company's board will listen to his request and adopt a "more aggressive pace" as long as the share price remains undervalued in his eyes.
"While we recognize and applaud the company's previously increased share repurchase authorization, we ask you to consider our advice once again (to the benefit of all shareholders) and consider accelerating share repurchases again via a tender offer," he said. "Our valuation analysis tells us that Apple should trade at $203 per share today, and we believe the disconnect between that price and today's price reflects and undervaluation anomaly that will soon disappear."
The tone taken by Icahn in his latest letter is different than when he attempted to file a shareholder proxy vote to push Apple to repurchase more of its own shares late last year. Icahn eventually dropped that initiative after Apple bought some $14 billion worth of its own shares in a matter of weeks in early 2014, in what was the largest repurchase on record for such a short period.
As of August, Icahn had some 45 million shares in AAPL stock, making him a considerable investor in the iPhone maker. His position in the company, and stature on Wall Street, earned him a private meeting with Cook last year.
The activist investor has a history of causing trouble with tech companies, most famously opposing Michael Dell's efforts to take PC maker Dell private. He also won three seats on the Yahoo Board of Directors, and is credited with helping to oust the CEO of Motorola, essentially forcing the company into the arms of Google.
And earlier this year, Icahn had pushed for eBay to spin off part of PayPal, even going as far as to draw up a proposal to shareholders that caused bad blood between him and eBay's management. Though the proposal was ultimately dropped, eBay and PayPal did split last week.
Icahn's new note, entitled "Sale: Apple Shares at Half Price," was published to his website Shareholders' Square Table. As the title reflects, Icahn believes that shares of AAPL stock are currently trading at half of their actual value.
Specifically, Icahn said his forecasted growth for fiscal year 2016 and 2017, along with net cash, values Apple stock at $203 per share today.
As of the end of last quarter, Apple had $133 billion in net cash, which Icahn called an "excessive liquidity." Given its cash position and the current share price, he believes Cook should ask the Apple Board of Directors to "accelerate and increase the magnitude of share repurchases" through a tender offer.
Billionaire Carl Icahn believes shares of Apple should be trading at $203 today, presenting the company with an opportunity to buy now at half-price.
"We commit to this because we believe Apple remains dramatically undervalued," Icahn wrote. "And we think you and the Board agree. If you did not, you would not continue to repurchase shares under the existing authorization. You have said before that the company likes to be "opportunistic" when repurchasing shares and we appreciate that. With this letter we simply hope to express to you that now is a very opportunistic time to do so."
In his note, Icahn goes into great detail about how he believes the iPhone will continue to hold "significant premium market share," and that Apple's high retention rates will keep customers coming back. He also has high hopes for future products and services, such as the Apple Watch and Apple Pay.
"These new launches will further distance Apple's ecosystem from its peers and accelerate revenue and earnings growth in excess of the status quo," he said.
Icahn's forecasts assume that Apple will continue to repurchase its own stock at a rate of $25 billion per year. But he hopes the company's board will listen to his request and adopt a "more aggressive pace" as long as the share price remains undervalued in his eyes.
"While we recognize and applaud the company's previously increased share repurchase authorization, we ask you to consider our advice once again (to the benefit of all shareholders) and consider accelerating share repurchases again via a tender offer," he said. "Our valuation analysis tells us that Apple should trade at $203 per share today, and we believe the disconnect between that price and today's price reflects and undervaluation anomaly that will soon disappear."
The tone taken by Icahn in his latest letter is different than when he attempted to file a shareholder proxy vote to push Apple to repurchase more of its own shares late last year. Icahn eventually dropped that initiative after Apple bought some $14 billion worth of its own shares in a matter of weeks in early 2014, in what was the largest repurchase on record for such a short period.
As of August, Icahn had some 45 million shares in AAPL stock, making him a considerable investor in the iPhone maker. His position in the company, and stature on Wall Street, earned him a private meeting with Cook last year.
The activist investor has a history of causing trouble with tech companies, most famously opposing Michael Dell's efforts to take PC maker Dell private. He also won three seats on the Yahoo Board of Directors, and is credited with helping to oust the CEO of Motorola, essentially forcing the company into the arms of Google.
And earlier this year, Icahn had pushed for eBay to spin off part of PayPal, even going as far as to draw up a proposal to shareholders that caused bad blood between him and eBay's management. Though the proposal was ultimately dropped, eBay and PayPal did split last week.
Comments
I own Apple Stock but I am not a savvy investor. Can someone explain why Icahn wants this and what the impact would be on the company and the investors?
Agreed on the valuation, not so sure Apple buying back a ton of stock will get it there. There's just too much lunacy in the world regarding Apple right now, everyone loves to tear them down (envy?).
#evilcaptkirk
I (heart) this post
Actually the letter contains a pretty reasonable valuation analysis. The only point I would quibble with is not his earnings analysis but whether Apple will ever get as high a multiple as he suggests. There is some good commentary by Horace Dediu on why the market consistently prices Apple as if it is going out of business tomorrow.
It's an interesting letter. I don't think Icahn really expects Apple to accelerate repurchases, especially since his entire valuation does not factor into account anti-dilution effects of such repurchases. There's also the issue that most of the cash is overseas and cannot be used for repurchases without paying hefty taxes. I think Apple has stretched its onshore cash about as far as it will go for repurchases.
I think the last paragraphs of the letter are what it's all about. He's pointing out to the institutional investors that they are in danger of lagging Index fund performance (and thereby bringing into question what value they provide as active managers) if they do not step up their purchases of Apple. It can be summarized simply as - "If you expect Apple to outperform the market as a whole, you need to own at least an amount of Apple equal to its market weight if you don't want to fall behind your peers' performance."
As an Apple shareholder all I can say is more power to him.
How would Apple be able to buy back so many shares? Icahn mentions their $133B in liquidity, but my understanding is that a large portion of that is held in foreign banks. If they repatriate it to buy back stock they would have to pay taxes on it. How do they get around that?
Actually the letter contains a pretty reasonable valuation analysis. The only point I would quibble with is not his earnings analysis but whether Apple will ever get as high a multiple as he suggests. There is some good commentary by Horace Dediu on why the market consistently prices Apple as if it is going out of business tomorrow.
It's an interesting letter. I don't think Icahn really expects Apple to accelerate repurchases, especially since his entire valuation does not factor into account anti-dilution effects of such repurchases. There's also the issue that most of the cash is overseas and cannot be used for repurchases without paying hefty taxes. I think Apple has stretched its onshore cash about as far as it will go for repurchases.
I think the last paragraphs of the letter are what it's all about. He's pointing out to the institutional investors that they are in danger of lagging Index fund performance (and thereby bringing into question what value they provide as active managers) if they do not step up their purchases of Apple. It can be summarized simply as - "If you expect Apple to outperform the market as a whole, you need to own at least an amount of Apple equal to its market weight if you don't want to fall behind your peers' performance."
As an Apple shareholder all I can say is more power to him.
How would Apple be able to buy back so many shares? Icahn mentions their $133B in liquidity, but my understanding is that a large portion of that is held in foreign banks. If they repatriate it to buy back stock they would have to pay taxes on it. How do they get around that?
Same way they did before, issue bonds.
I never left.
I critically questioned Apple/Cook after the GTAT Bankruptcy but after further reading I'm convinced that GTAT was soley at fault.
By the way I never sold my 550 shares
Critically blamed Apple/Cook is what you did, and you left a trail to prove that.
Now that the facts come in, you've tried to roll that back.
Here's the thing.
Cook runs a company to maximize its long term future. Icahn wants to maximize his profits at a point in time. Either or both may be beneficial to the investor, but I trust Cook. I don't trust Icahn.
Cook and Icahn were in agreement on the buyback, but Cook's leadership is driving the company profits today, not Icahn's.
Textbook 101 for hostile takeover, step 2 - strip company from cash. He started right, obtaining needed amount of shares, but then went too fast and tried oust Cook. He failed then. Now he's back on track. Cook and co, they will go when company starts slipping into debts. And then endgame - yard sale. Interesting, who will buy up the sweetest part, iPhone? It's a big opportunity for Samsung to back away from Google. Or will it be Lenovo? They both have the cash and they want it badly. And just for laughs - what sum will be paid for iPhone?
Anyway, I must admit, if this 80 year old man can bring down company like Apple, it would be epic. He will be "THE" investment banker.
And the valuation of $203? Let's charitably say, nuts. :rolleyes:
He wants it because a buyback would add long-term value to all shares of stock, by retiring shares at a (presumed) discounted price. This is true whether Icahn sells his shares after 1 year or 10 years. It would have little impact on the company provided it was done responsibly, which of course it would be. By pumping the stock, however, perhaps he is aiming to put pricing pressure on Apple to buy more shares quickly before the price goes up. More charitably, perhaps the timing is related to Apple's annual review of their buy back regimen, or perhaps in advance of expected strong earnings reports from iphone 6 sales.
An Open Letter to Tim Cook...
Dear Tim,
Tell Icahn to go screw himself.
Sincerely,
Me