5 Apple Predictions Made By Carl Icahn

(Photo by Michael Nagle/Getty Images)

Michael Nagle/Getty Images

Activist investor Carl Icahn is once again pushing Apple CEO Tim Cook to expand the company’s share repurchase program in an effort to correct what he characterized as “a massive undervaluation of Apple in today’s market.” In an open letter published on his Shareholders’ Square Table website, Icahn noted that the company had an “excessive liquidity of $133 billion net cash” and asked Cook and the rest of Apple’s board to make a tender offer to “meaningfully accelerate and increase the magnitude of share repurchases.” He also offered to refrain from tendering his own shares if Apple consummated any tender offer in order to “preemptively diffuse any cynical criticism.”

Icahn’s latest push for Apple to return more cash to shareholders by expanding its share repurchase program echoes a similar campaign he undertook  last year. Last September, Icahn repeatedly told the media that the stock could trade at $700 a share if Apple funded a $150 billion stock buyback. However, Icahn eventually dropped his buyback proposal after Cook revealed that the company had repurchased $14 billion of its own shares in an interview with The Wall Street Journal in February 2014. In August 2014, Apple’s share price crossed the $100 threshold, which would be the equivalent of $700 in split-adjusted terms. (Apple shares underwent a seven-for-one split in June 2014.)

While Icahn’s request that Apple repurchase more of its own shares is hardly unusual, the billionaire investor’s recent open letter also included several surprising predictions about Apple’s products and what he believes the company will achieve over the next several years. Needless to say, there is no shortage of analysts and pundits who will weigh in with predictions on Apple’s future, and their forecasts should always be taken with a grain of salt. On the other hand, it should be noted that Icahn pegged Apple’s shares as undervalued over a year ago and the current price seems to bear out his prediction. Icahn also cited the possibility of an Apple smartwatch and a mobile payments system in an open letter to shareholders in January 2014, long before both products were confirmed by Apple in September. Keeping that in mind, here are five other things that Carl Icahn now sees in Apple’s future.

Apple CEO Tim Cook shows off the new iPhone 6 and the Apple Watch during an Apple special event

Justin Sullivan/ Getty Images

Apple’s shares trading at $203

As he has in previous open letters to Cook, Icahn reiterated his argument that Apple is massively undervalued. However, this time Icahn believes that the company is undervalued even more drastically than it was last fall. The activist investor believes that the new iPhone models, along with a “growing collection of products and services,” is working together to make Apple “an increasingly dominant mobile ecosystem” that will allow the company to achieve EPS growth of 44% and revenue growth of 25% during fiscal year 2015, followed by 30% EPS growth in 2016 and 2017.

Based on this forecasted growth rate, along with Apple’s $133 billion net cash, Icahn believes that Apple shares should be trading at $203 instead of the current price around $101. Of course, it should be pointed out that as a “large Apple shareholder with approximately 53 million shares,” Icahn has an obvious personal interest in seeing Apple stock double in value.

Apple’s iPhone will steal Android’s premium market share

While Apple’s iPhones already dominate the high-end segment of the smartphone market, Icahn sees this trend accelerating over the next several years at the expense of devices powered by Google’s open source Android operating system. Now that the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus have given Apple large-screen competitors to Samsung’s similarly sized phablets, Icahn believes that Android’s share of the high-end smartphone market will decline even further. Since premium Android smartphones like the ones made by Samsung now sell for around the same price as Apple’s new iPhone models, Icahn noted that the “choice between them is analogous to the choice between a Volkswagen over a Mercedes at the same price.”

IBM's Virginia Rometty and Apple's Tim Cook

Source: IBM.com

Icahn also believes that Google’s reliance on advertising will increasingly become a liability as the public’s concern over privacy issues continues to grow. According to Google’s earnings report, almost $50.6 billion of the $55.5 billion in total revenue it made last year came from advertising. On the other hand, Icahn made no mention of Apple’s recent iCloud hacking controversy in which dozens of celebrities had their private photos stolen and posted on the Internet. “As the quality of the Apple ecosystem (iPhone, iPad, Mac, iTunes, App Store) continues with new additions (Apple Watch, Apple Pay, Home, Health, Continuity, iCloud) to pull away from a relatively flawed and fragmented Android ecosystem, market share gains will continue,” wrote Icahn.

Enterprise partnership and a large-screen iPad will reaccelerate growth

Despite a disappointing performance in fiscal year 2014, Icahn sees the iPad product line reaccelerating growth next year as Apple expands into business through its recently announced partnership with IBM. According to IDC statistics, Apple’s share of the worldwide tablet market declined to just below 27% in the second quarter of 2014 from the 33% share it held in the year-ago quarter.

“We believe there is still a large growth opportunity for iPad, as you highlighted when you stated that ‘the PC market today is 315 million units’ and ‘despite the iPad’s 76% market share of tablets sold to businesses, the penetration of tablets in businesses is low at 20% and, to put that in some kind of context, if you looked at the penetration of notebooks in business it would be over 60%,’” wrote Icahn in his letter addressed to Tim Cook. “With the recently announced partnership with IBM, which you suggested will ‘change how businesses work,’ we believe iPad will increase its penetration of enterprise.”

Icahn also cited the possibility of a 12.9-inch iPad as another potential catalyst for growth. There are several industry watchers that believe Apple may unveil a new larger-screen iPad at the company’s next media event on October 16, including Piper Jaffray analyst Gene Munster.

Source: Apple.com

Source: Apple.com

UltraHD television set may arrive in 2016

Besides outlining the possibilities for growth in Apple’s current product lineups, Icahn also predicted that the company may finally enter the television set market with an “UltraHD TV set” in fiscal year 2016. According to Icahn, “UltraHD’s (ultra-high-definition television) superior picture quality in comparison to regular HD will drive a major TV replacement cycle as the price gap between them narrows.”

For this reason, he believes that fiscal year 2016 will be an opportune time for Apple to make its entry into the television set market. Icahn predicted that Apple may sell “12 million 55-inch and 65-inch TV sets in FY 2016 and 25 million in FY 2017 at an average selling price of $1,500 at gross margins consistent with the overall company.”

Although rumors of an Apple television set have persisted for several years now, it should be noted that the California-based company still appears to be more interested in expanding the capabilities of its existing Apple TV product, rather than creating its own television set. For example, earlier this year, The Wall Street Journal reported that Apple was in negotiations with Comcast over the possibility of allowing Apple TV travel on a separate, less-congested part of the network. More recently, the United States Patent and Trademark Office published an Apple patent application that outlined a new type of app that would allow iOS-based devices to be used as interactive “second screens” that would complement Apple TV content. Both initiatives suggest that Apple is focused on improving its set top box rather than creating a television set.

Apple Pay

Source: Apple.com

Apple Pay will succeed where others failed

Icahn believes Apple’s recently unveiled NFC-powered mobile payments system will succeed where similar systems such as the Android-based Google Wallet have failed due to Apple customers’ tendency to spend more money than Android users. However, unlike many other analysts who believe that the main benefit of Apple Pay will be to draw more users into the company’s ecosystem, Icahn believes that Apple will generate significant revenue directly from the transaction fees the service charges.

“We estimate that, based upon Apple Pay’s rumored fee of 15 bps of all spend on credit and debit cards (U.S. card spend was $4.2 trillion in 2012) and merchant deployment of NFC reaching 80%+ in 2017, Apple in the U.S. could generate revenues (also equivalent to gross margins, as the variable costs are de minimis) of $2.5 billion in FY 2017 if it reaches 30% market share of all spend on U.S. credit and debit cards,” wrote Icahn.

Icahn’s optimistic Apple Pay revenue estimate stands in stark contrast to the estimates offered by most other analysts. For example, according to Trefis analysts cited by Forbes, “If the company is able to maintain a 50% market share in the global in-store payments market, while growing its share of mobile commerce transactions to about 20% by the end of our forecast period in 2021 (assuming the company offers Apple Pay on its new iPads), this could translate to annual revenues of around $800 million by 2021, assuming a 0.15% transaction fee.”

Obviously, it will be a while before we know if Icahn’s predictions about Apple’s true valuation and future products are accurate. However, shareholders didn’t have to wait long to hear Apple’s response to the activist investor’s push for more share buybacks. “We always appreciate hearing from our shareholders,” said Apple in a statement obtained by CNBC. “Since 2013, we’ve been aggressively executing the largest capital return program in corporate history. As we’ve said before, we will review the program annually and take into account the input from all of our shareholders.”

Follow Nathanael on Twitter (@ArnoldEtan_WSCS)

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