What Carl Icahn's message to Tim Cook really means

Earlier today billionaire hedge fund icon Carl Icahn released the open letter to Tim Cook that he promised was coming. It's pretty long and the bulk of the content reads like a miniature version of a Wall Street analyst report justifying a "buy" recommendation on the stock.

My first thought: Can this guy not throw in a few more paragraph breaks? It's insanely hard to read gigantic seas of text with no white space. Clearly Apple's copywriters didn't get a chance to edit the piece.

Jokes aside, Icahn feels that Apple is dramatically undervalued. He points out that, adjusted for cash holdings, the stock trades at only 8 times earnings despite his prediction for 30% earnings per share growth in both FY16 and FY17. Icahn thinks this type of valuation is both "irrational and transient in nature."

In other words, Icahn thinks Apple stock will climb a lot in a short period of time. As a result he thinks they should be getting WAY more aggressive with their stock buyback.

If you're not familiar with buybacks and investing in general, the idea is simple. A company can use its cash to buy its own shares and cancel them so they don't exist anymore. The company's cash balance will drop, but the number of shares in existence will also drop. This means the value of the company will be allocated between fewer shares, so all of the remaining shares should rise in value.

But Icahn's letter says a lot more than this. It goes through his firm's bull thesis in great detail. He discusses the iPhone taking away market share from Android, growth of the iPad and Mac business and big expectation for Apple Pay and the Apple Watch. He even discusses the possibility of an Apple Ultra HD TV coming to market at some point.

How is it that Icahn needs to educate Tim Cook on why Apple has such great prospects? That's the part that seems strange to me. I'm sure that Icahn is indeed bullish on Apple. I just can't help but feel he doesn't expect Cook and the Apple board to react with a bigger buyback, so he might as well lay out a huge (and public) buy thesis to drive other investors to get on board.

Heck, the idea of a bigger buyback coming would be enough to get some major funds, who are underweight, to take a larger position. This helps existing shareholders like Icahn.

Giant seas of text with no paragraph breaks aside, the letter is a good read and does a nice job layout out the potential upside in Apple. It certainly explains why one well known marketing professor feels Apple could be the world's first trillion dollar company.