Apple watchers have been abuzz over the last day and a half as the iPhone-maker’s market capitalization reached, then breached the $700 billion mark. On Wednesday, Carl Icahnwaved the figurative pom-poms to argue why market is still giving the stock a bad rap and Apple is actually worth more than $1 trillion.
In a public letter addressed to his Twitter followers, Icahn bemoaned the fact that Apple, even after selling nearly 75 million iPhones in its holiday quarter, still fetches a multiple smaller than that of the S&P 500.
The S&P 500 goes for 17 times expected 2015 earnings, while Apple goes for less than 15 times. Icahn, his son Brett Icahn and colleague David Schechter (co-signers on the letter) think the company should earn $9.70 per share in fiscal 2015. That’s wildly above consensus the $8.49 consensus of 47 analysts compiled by FactSet, but the Icahn trio think analysts are overestimating Apple’s tax rate (largely due to the treatment of cash held overseas).
Whatever the rationale, the $9.70 estimate from the Icahn group means that Apple shares at current levels go for only about 10 times earnings after stripping out the company’s $22.31 per share in cash.
Given its rapid growth, Apple should be fetching a premium to the market, not trading at a “totally irrational” discount, Icahn’s argument goes, and with his prescribed 20x multiple, shares are worth a stunning $216 per share, which would render a market valuation of nearly $1.3 trillion.
That isn’t a pie-in-the-sky future projection based on a bunch of successful new products like the Apple Watch and a television either, according to Icahn. “This is not a future price target,” he write. “$216 is what we think Apple is worth TODAY.” If a TV product comes through the pipeline in the next few years, they even think their multiple rationale is conservative.
Already the most valuable company by market capitalization in U.S. history, such a figure would put Apple miles ahead of its nearest competition (even the inflation-adjusted juggernaut posed by dotcom-era Microsoft ).
“It is now plainly obvious to us that there will be no stopping Apple’s peerless innovation track record and best-in-class ecosystem of services, software, and hardware, and that Apple will continue dominating the premium smartphone market by continuing to take premium market share from Google ’s Android operating system (and Android-device manufacturers),” Icahn writes, “while at the same time maintaining or growing average selling prices and gross margins.”
Forbes contributor Chuck Jones attempted to explain why Apple trades at a discount to the market in a post Tuesday, and notes that growing a $200 billion revenue base at the rate Apple is expected to is an unprecedented feat:
[T]he company has to sell $200 billion worth of product and services just to stay even with the previous year and 5 percent growth is another $10 billion on top of the $200 billion. At 10 percent it’s another $20 billion. And then the next year and next year require growth so depending on the rate and timeframe Apple could need to generate $300 billion in revenue to not have growth investors become disenchanted with the stock.
Icahn’s letter, which comes a day after Tim Cook reiterated his commitment to returning excess cash to shareholders at a Goldman Sachs conference in San Francisco, makes it seem like ancient history when Icahn (and Greenlight Capital’s David Einhorn before him) was railing against Apple’s tightfisted ways with its cash.
Via: Forbes.com
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