Carl Icahn has a reputation for using his big microphone to get technology companies whose businesses he doesn't understand to do something that he does -- conduct what former Labor Secretary Robert Reich dubbed paper entrepreneurialism -- boosting stock price through balance sheet manipulations like buying back shares and spinning off businesses.
This comes to mind in considering Icahn's call last week that
Although I don't know why stocks go up or down, I believe Icahn's success is due to his ability to convince big investors that others will follow his lead rather than deep insights into how a company's products can gain market share -- and hence boost its future cash flows.
On October 9, Icahn announced in a 5,232 word, poorly-formatted missive that Apple was worth $203 a share -- more than double the roughly $100 a share at which it ended October 10.
His letter faults Apple CEO Tim Cook for a failure of paper entrepreneurialism -- urging Apple to buy back $100 billion worth of shares -- a move into which Icahn pledged not to sell his 53 million shares -- leaving Apple with $33 billion in cash.
1. IPhone Does Not Trump Android
Bloomberg noted that Icahn believes the iPhone 6 and 6 Plus will take market share from
Sadly for Icahn's argument, the iPhone is losing market share to Android. According to IDC Smartphone OS Market Share, Q2 2014, between the second quarter of 2011 and 2014, the iPhone's share of the global smartphone market fell from 18.3% to 11.7% while Android's share soared from 36.1% to 84.7%. Apple's declining share is due to "the growing shift of demand toward low-cost smartphones," according to IDC.
2. Apple Watch Will Disappoint
Apple Watch -- a device that none of the roughly 100 students I have interviewed (over 90% of whom own iPhones) would buy -- is not going to sell 20 million units for $450 apiece in 2015 as Icahn estimates.
Icahn's forecast defies logic -- after all to sell 20 million units in 2015, Apple would have to go from 0% share -- with significant competition from the Pebble smart watch, Samsung Galaxy Gear, and the
IDC estimates that 34 million smart watches will be sold in 2015 -- up 78% from its 2014 estimate of 19.2 million units sold. Moreover, Piper Jaffray found that most people would be willing to pay $100 to $150 for the Apple Watch.
In short, at $9 billion -- the same figure
3. IPads Will Have Limited Traction In the Business Market
Icahn believes that new iPads and Apple's July partnership announcement with
That is another overly optimistic forecast. In July Apple reported that iPad unit sales fell 9% to 13.3 million units and revenue declined 8% to $5.9 billion.
Apple is falling faster than the tablet market. According to IDC, the overall tablet market fell by 1.5% between the first and second quarters of 2014 due to "the increasing popularity of phablets -- which make smaller-sized tablets almost redundant."
Apple's newest smart phones may be cannibalizing iPad revenues.
4. Apple HDTV Will Remain a Fanboy Fever Dream
If Apple is poised to start selling an ultra-high-definition TV in FY 2016, the company ought to announce it in the interest of full disclosure. Since I am going to assume that Apple is complying with reporting requirements, Icahn's idea that Apple will sell 12 million 55-inch and 65-inch TV sets in 2016 and 25 million in 2017 is some kind of fever dream.
5. Apple Pay Will Bounce
Icahn thinks Apple Pay -- its new mobile payment system -- will boost Apple's revenues by $2.5 billion in FY 2017 if it takes 30% of U.S. credit and debit card spending.
I am skeptical. Nomura analyst Stuart Jeffrey comes up with a much smaller number -- somewhere between 0.3% and 0.6% of Apple's 2017 revenue or “revenue upside of $0.4 billion to $1.2 billion," according to Barron's.
6. Icahn Exaggerates Apple's Earnings Growth and Value
Apple is currently $103 billion over-valued based on its price/earnings to growth ratio. I come to that conclusion based on its P/E of 16.27 and earnings expected to grow 13.4% -- from $6.33 in fiscal 2014 to $7.18 in FY 2015, according to Zacks Investment Research. Icahn thinks Apple will earn about 37% more, or $9.81.
The Zacks estimate gives Apple a Price/Earnings to Growth ratio of 1.21. If it were trading at fair value -- in my opinion that's a PEG of 1.0 -- it would sell for about $83 a share.
That would value Apple at nearly $500 billion -- or $700 billion less than what Icahn thinks it's worth.
I will give Icahn's 5,232 page letter the last SHOUTED words: "THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT."
