New York, New York, May 18, 2015 – Today Carl Icahn released the attached open letter to Tim Cook, the Chief Executive Officer of Apple Inc.
We again applaud you and the rest of management for Apple’s impressive operational performance and growth. It is truly impressive that, despite severe foreign exchange headwinds and massive growth in investment (in both R&D and SG&A), the company will still grow earnings by 40% this year, according to our forecast. After reflecting upon Apple’s tremendous success, 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. We believe this may lead to a de facto short squeeze, as underweight actively managed mutual funds and hedge funds correct their misguided positions. To arrive at the value of $240 per share, we forecast FY2016 EPS of $12.00 (excluding net interest income), apply a P/E multiple of 18x, and then add $24.44 of net cash per share. Considering our forecast for 30% EPS growth in FY 2017 and our belief Apple will soon enter two new markets (Television and the Automobile) with a combined addressable market size of $2.2 trillion, we think a multiple of 18x is a very conservative premium to that of the overall market. Considering the massive scope of its growth opportunities and track record of dominating new categories, we actually think 18x will ultimately prove to be too conservative, especially since we view the market in general as having much lower growth prospects.
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. We appreciate that the Board just increased the share repurchase authorization by $50 billion, and that it continues to prioritize share repurchases over dividends (as it should). We again simply ask you to help us convince the board of how these two underlying issues (inefficient net cash growth and share undervaluation) persist and combine to enhance the opportunity for accelerated share repurchases in greater magnitude. We also ask you to help us convince the board that this is not a choice between investing in growth and share repurchases. As our model forecasts, despite more than 30% growth in R&D annually through FY 2017 to $13.5 billion (up from $1.8 billion in FY 2010) and your updated capital return program, Apple’s net cash position (currently the largest of any company in history) will continue to build on the balance sheet.
It is our belief that large institutional investors, Wall Street analysts and the news media alike continue to misunderstand Apple and generally fail to value Apple’s net cash separately from its business, fail to adjust earnings to reflect Apple’s real cash tax rate, fail to recognize the growth prospects of Apple entering new categories, and fail to recognize that Apple will maintain pricing and margins, despite significant evidence to the contrary. Collectively, these failures have caused Apple’s earnings multiple to stay irrationally discounted, in our view.
Read the full letter: