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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.

Former sell side analyst, out-of-box thinker, consultant, entrepreneur. Interests: Wife & kids, tech, NLP, fitness, travel, investing, 4HWW.

19 Comments
  • One has to wonder how many shares this guy owns & how much he has to gain from a suggestion or analysis like this. Sent from the iMore App
  • 53 million shares valued at around $5.3 billion which amounts to approximately 0.9% of Apple.
  • You spent far too many words explaining the fact that he is a greedy, opportunistic salesman.
  • Hilarious reply! Thanks. I love the sense of humour.
  • Total snoozefest.
    Could almost see Tim Cook's eyes rolling back
  • I'm in total agreement with the three posts above Posted via the Android iMore App!
  • Just for clarification, this is a billionaire's version of a pump and dump, except he probably won't dump his own shares, just the ones he manages and then claim that he "makes his clients lots of money!". Then just sit back and collect even more for himself.
  • What is not discussed is the fact that with the way Wall Street plays games with Apple stock it is advantageous (read profitable) for them to devalue Apple during times when either products or earnings are announced. As time to the announcement gets closer, then share price runs up dramatically only to go back to the earlier baseline after the announcement. This dance has been going on for a decade and shows no sign of going away because it makes people money. Truthfully, Apple has never cared about share price. While it's nice to talk about when it's up the day to day fluctuations do nothing but distract them from making the products that they want. So, all if this is for the rest of the world (mostly financial) not for Tim Cook or the Apple board.
  • Wall Street plays games, period. it's the world's biggest casino.
  • Icahn cares nothing for Apple. He wants to make more money from his shares in the company and so he is AGAIN asking for a buyback. Stop giving this greedy person attention. He is the perfect illustration of what's wrong with the business world.
  • This guy only cares about his shares, nothing else. Who the hell does he think he is telling a CEO how to run his business, he's just an investor, he should shut up, sell all his shares of apple stock, and buy someone else's stock, one that he can control! An investor has no say in the business he is investing in, unless said business has either given him that privilege or put him on the board. Investors do not necessarily know how to run a business, they know the stock market, and should leave the business alone, buy or sell shares. Personally, it sounds like he has not diversified his investments, which is not smart. I wonder if he just wants attention, and now I've helped him get some. :/ (Thank you for a more stand back perspective.)
  • "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." This letter wasn't for Tim Cook. It was for everyone else to see what Icahn was saying to "Tim Cook" so they would take interest in Apple so Icahn's shares would be worth more. Period. He cares nothing for Apple, never has and never will.
  • That's pretty much what I said, no?
  • You really need to change the headline on this article. In no way whatsoever does this article explain "What Carl Icahn's message ... really means." That's a blatant lie. The worst kind of click-bait. All you've done is a warm re-hash of everything we already knew about the letter. You don't even add any opinion, let alone new information or insight. Everything you have said, he already said in the letter. These over-hyped "non-articles" are really infuriating and disrespectful of the people that come to this site.
  • agreed. Double agreed
  • Thank you for your thoughtful feedback. Now back to my article, "Here's the one thing almost nobody understands about next week's iPad event" :)
  • If he really wanted Apple to buy back the stock at a cheep price he wouldn't have made it an open letter. He's got a big ego and he likes money. His purpose is publicity and to make Apples stock go up. That is all.
  • "If you're not familiar with buybacks and investing in general" - I belong here. Thanks as always Chris for explaining.
  • This guy is in a position that he doesnt even need insider trading or anything of the like. He is influent enough to almost dictate corporate finance policy ensuring he profits from it. Awesome. But the real question remains: why IN HELL doesnt he write Tim Cook a letter asking for a 13' Retina Macbook Air?? Now, that's the kind of leverage I would need.