Carl Icahn is out with a new letter to Tim Cook arguing that Apple should buy back more shares and that the stock is grossly undervalued. He says it should be worth $240/share. That's up dramatically from the $130.50 level it trades at today.
First, here's Icahn's core argument for why the stock could be worth that much:
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.
Here are the key points in the letter that make Icahn so optimistic about Apple
Icahn says Apple is poised to enter huge new markets:
"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."
Optimism over earnings is justified:
While our forecast for FY 2016 EPS is significantly above Wall Street consensus today, in October 2014 so was our original forecast for FY 2015 EPS, which is now in line with the Wall Street consensus. We are optimistic that ecosystem improvements (Apple Watch, Apple Pay, Homekit and Healthkit in particular) will drive modest growth in iPhone revenues next year, despite the difficult comparison that will result from iPhone’s tremendous performance this year
TV could be massive:
Excluding advertising, the addressable market for television is approximately $575 billion, which is larger than the smartphone market. Also, given that people spend an average of 12% of the day watching TV (equating to 25% of their free time), we view television’s role in the living room as a strategically compelling bolt-on to the Apple ecosystem.
And the car market will dwarf everything:
At $1.6 trillion, the enormous addressable market for new cars is approximately four times the size of the smartphone market.
And Apple is in a great position to do cars:
As a mobile device that is differentiated by design, brand, and consumer experience where software and services are increasingly critical, an Apple car would seem to be uniquely positioned.
In the meantime, the core business still has massive potential:
While the television and the car offer tremendous growth opportunities, Apple’s core ecosystem continues to improve and grow, now sometimes referred to as a “mega-ecosystem”, a term we find increasingly appropriate, as we look at the breadth of its components, which now include existing products (iPhone, Apple Watch, Mac, iPad, Beats, Apple TV), software/services (Apple Pay, Homekit, Healthkit, Carplay, iCloud, iTunes, and rumored Beats Music, pay TV service), as well as possible new products in new categories (a Car, a TV set).
For more on Icahn's letter, see here.