No, Carl Icahn: Apple Inc. Shouldn't Trade at Google Inc. Multiples

No doubt about it: Longtime activist investor Carl Icahn knows a thing or two about spotting good opportunities. Icahn's investment fund ended last year up 31%, about the same as the U.S. market. Not bad in a year when many hedge funds underperformed. Investors were also duly impressed with Icahn's stake in high-flyers like Netflix, which jumped a whopping 283% last year and netted his firm a small fortune.

The iconic investor's success in 2013 catapulted the stock price of his publicly traded investment vehicle, Icahn Enterprises (NASDAQ: IEP  ) , to a nearly 160% increase last year. And that brings us to Icahn's latest pet project, Apple (NASDAQ: AAPL  ) . As his tweet late last month after adding another $500 million in iShares reminded us, Icahn owns a lot of Apple stock: more than $3 billion worth, based on yesterday's close. And his seemingly unending tweets, interviews, and requests for increasing Apple's stock buyback program -- even beyond the recent $14 billion in shares CEO Tim Cook recently bought back -- makes it clear how he'd try to boost its share price. But suggesting that Apple should trade anywhere near $1,245 a share, as Icahn recently did via, what else, a tweet, is over the top.

Icahn's logic
In yet another Twitter missive yesterday, Icahn compared Apple to Google's (NASDAQ: GOOGL  ) valuation, tweeting:

$GOOG @ 19x2014 est operating profit. At same multiple $AAPL=$1,245 per share. Ridiculous. Keep buying Tim! You still have $145 billion cash.

Of course, as iFans know, Apple closed yesterday up $7.17 a share, to $519.68,  bout where its stock price has meandered for a while now. So $1,245 per share is quite a leap, even for Icahn.

In his open letter to Apple shareholders late last month, Icahn listed several reasons he thinks Apple is undervalued -- after reminding shareholders of his many investment successes-and it's difficult to argue with many of his assertions. Apple, as Icahn pointed out, was trading over 70% below the average price-to-earnings multiple of the S&P 500. Icahn also cited Apple's strong cash position and earnings estimates of nearly $40 billion this year as upsides.

Of course, expected earnings in 2014 and $130 billion in net cash, as per Icahn's open letter, are the impetus for his continued calls for Cook to buy back more and more stock. With its shareholder meeting scheduled for Feb. 28, you can expect to hear more Apple stock buyback chatter from Icahn in the coming days and weeks.

So why isn't Apple trading like Google?
Both Apple and its smartphone OS nemesis Google generate revenues and profits that are the envy of their peers. However, there are distinctions between Apple and Google -- some tangible, some intangible -- that have contributed to the moving of their respective stock prices in opposite directions. Apple's woes are well documented: margin concerns as the mobile industry becomes even more hyper-competitive, its reliance on iPhones for the vast majority of its profits, and a lack of innovative, new products.

The problem in comparing Apple and Google's stock price today is that the former's shortcomings are all Google strengths. With its diversity of products including search, its own and partner's websites, and world-leading mobile OS Android driving ad revenues, Google shareholders aren't worried about margins or revenue diversification. As for innovation; self-driving cars, Fiber Internet, and Glass, are just a few of the cutting-edge technologies that puts Google in a class by itself.

Final Foolish thoughts
One look at Icahn's sale of Netflix stock last year -- though he still holds a good-sized chunk -- should be telling for Apple investors. Icahn let the world know he bought Netflix, hyped it to no end, and then sold it after its incredible run-up for an $825 million gain. In short, Icahn is the yin to buy-and-hold guru Warren Buffett's yang.

Icahn is interested in gains, plain and simple, and who can blame him? And if generating those investment gains means hyping a stock via traditional and social media outlets, Icahn's your guy. But valuing Apple at $1,245 a share based on a strong cash position and rumored new products doesn't fly. Hype, good or bad, unfortunately can have a short-term impact on stock prices. The problem with Icahn's public relations campaign for all things Apple is once he gets his stock price pop, he's gone. Not exactly a model for long-term investors.

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Read/Post Comments (18) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On February 08, 2014, at 3:12 PM, jdw wrote:

    Respectfully... I still don't get the Google valuation. Search and Android is same thing...ads! Not diversified. Auto bot vehicles, glass, fiber internet, great, BUT how much does that pull in.

    Apple May or May not have another big product, but of they do it will mean billions of new revenue nearly immediately.

  • Report this Comment On February 08, 2014, at 5:11 PM, duuude1 wrote:

    I agree with jdw - although I'm invested with GOOG, I see them as a powerful but 1-dimensional (ad-based) tech company. Their primary products, search and Android, are both mechanisms for ad revenue. The huge earning they pull in lets them play in crazy technologies and development that most others cannot afford - but they have not developed any successful physical products that pull in anywhere near the revenues and earnings that AAPL does. They are not even in the same galaxy as AAPL's product development proficiency and success. When GOOG sells millions of units of hardware that pulls in 40% gross margins, then I'll say GOOG has learned how to engineer products. Until then, they are a bunch of software geeks with no design chops. Different skills, duuudes.

    Duuude1

  • Report this Comment On February 08, 2014, at 11:10 PM, twolf2919 wrote:

    Agreeing with the others: the author's assertion that Google is more diversified than Apple is laughable - it takes just one look at where the revenues come from - more than 90% is from ads. Google is a one-trick pony...but what a pony it is! Essentially having a monopoly, ad revenues are not cyclical and not subject to the vagaries of the economy. Unlike Apple, it doesn't have competition to worry about either....Google makes so much money from ads, it can afford those little publicity stunts the author calls "innovation" (Google wasn't the first on either the augmented reality wagon with Glass nor the first with self driving cars).

  • Report this Comment On February 08, 2014, at 11:13 PM, tychicum wrote:

    Ad revenue is pretty thin soup. I will take AAPL anytime over a company which sells wishes and promises ...

  • Report this Comment On February 09, 2014, at 1:00 AM, xinghui wrote:

    Innovative products count only when they help making money or generating income. None of Google Glass, self-driven car or fiber networks do so far. Only nerds will wear glass but there are not many nerds there. Glasses is functional device for the need and fashionable. Google glass fits neither one. Self-driven car is so far away to be realized thus people won't even bother to scrutinize. Fiber networks is all about creating bandwidth and those carries are building it. Apple is also quietly acquiring bandwidth too. It can be realized with building your own physical network, which is expensive to build and maintain.

    By the way, Apple's profit is not far away from Google's revenue. Apple's iPad not only dominates educational market but also enterprises. iPhone also prevails in the enterprise. When big screen iPhone is available, it will overwhelm the market. If Apple can make iPad mini why don't those pundits believe Apple could make big screen iPhone too? The issue is mobile phone has its own requirement to be made to meet Apple's product quality, just an example, battery life to support big screen retina display. It takes time to build a quality technology.

    It took Apple 3 years to make iPhone, not including time wasted working with Motorola to make RAZR with iPod built-in. It took 4 years for Apple to finish iPad. The innovative is already built in Apple's culture. When Apple released its iPhone, Google abandoned its own in development because it was so inferior.

    Besides Ad from search engine, what else does Google produce revenue significantly? Google voice looks like not competitive. People use Skype, Line, WeChat way more. Dropbox is way more popular than Google drive.

    It is a myth that Google is more innovative.

  • Report this Comment On February 09, 2014, at 1:41 AM, AceOfSaves wrote:

    I was shaking my head as I read through some parts of this article especially on the Google innovation advantage part as some have already mentioned.

    Yes, they make so much money from ads, but what happens when people start trying other search engines? There is no ecosystem to discourage people from switching search engines. Apple, on the other hand, does.

    Google has a lot of things going for them but they have had a lot of crappers as well (Motorola being the most recent). Their strategy is to throw as many things on the wall and see what sticks. No focus. Apple may have fewer products, but they all bring in profits.

    I know where my money is, literally.

    - AoS

    "Save more. Save often. Save now."

  • Report this Comment On February 09, 2014, at 2:06 AM, aeosfool wrote:

    Let me start off by saying I own both Apple and Google. If I were to buy more, it would definitely be Apple first.

    Apple is such a powerhouse in generating cash it can buy all its shares back if the market doesn't push the stock price up dramatically soon. It continues to build a loyal following and an approval rating far above others.

    Although the iphone does make up over 50% of its profits because of its blockbuster growth, other areas such as services and itunes/app store as well as ipad revenue are growing at a nice clip and should pick up more steam with the iwatch and itv. Google, on the other hand has these other flashy categories such as glass and self driving cars that bring in little revenue...sort of reminds me of Microsoft, really a one trick profit pony with many products that make no profit (X Box made nothing for many years) and they would have been better off concentrating on making their core product better.

    As Google's market cap approaches Apple's the fact which one is a new buy is even clearer.

  • Report this Comment On February 09, 2014, at 3:22 AM, deasystems wrote:

    You say that you have concerns about Apple's margins? You're concerned about the company that has higher gross margins than just about any other company in tech? Fascinating…

    You're also concerned about Apple's "lack of innovative, new products?" Uh, okay. I guess you're equally concerned about Samsung and Google's lack of same also, right? (Fictional products like Google's self-driving cars, Fiber Internet, and Glass don't count.)

    By the way, Google has absolutely no "diversity of products." Its sole source of revenue is online ads. And that source has had a continuing unit revenue decline for many quarters now.

  • Report this Comment On February 09, 2014, at 5:57 AM, random306 wrote:

    If goog glass were an apple product,we wouldn't even know about it right now. There might be rumors,but that is it. With a 3-5 year horizon,aapl has not yet failed to innovate. And when they do announce new products,the immediatly monetize them....weeks or days,not years. How much has goog made on their innovations? What if aapl were to start sharing add revs from their own free search feature in the form of a monthly phone bill credit buydown to the carriers. It might not make apple a fortune,but it would cost goog a mint,and force them to charge for android. Nothing goog is set in stone,apple has executed perfectly.

    Aapl =2 birds in the hand,with unlimited in the bush

    Goog=1 bird in the hand,and couple,possibly sickly in the bush

    Either can work well,but why take the risk?

  • Report this Comment On February 09, 2014, at 7:22 AM, henrystar wrote:

    These comments make me feel better! Long AAPL since $4.

  • Report this Comment On February 09, 2014, at 7:53 AM, CraigWPowell wrote:

    With Mr. Icahn or without Mr. Icahn, Apple is returned to the innovation mode:

    Dr. Apple come with the Medicine at your fingertips : iOS 8 will come in September and will transfer each iPhone to medical diagnostic device by the help of iWatch sensors.

    According to:

    I Know First algorithmic trading system

    $AAPL is excellent long term investment

  • Report this Comment On February 09, 2014, at 8:36 AM, gsagi wrote:

    I will go ALL THE WAY OVER THE TOP

    investors' view:

    Google = immortality = un-tarnishable gold = forever-internet = God

    Apple = mortality/decline = the flesh heading for the grave = aging commodities = Jesus in need for perpetual resurrection

    'wonder where the mortals place their bets? Do you REALLY believe that the stock-markets are rational? Post-modernist economists are beginning to get the message...

  • Report this Comment On February 09, 2014, at 10:27 AM, imurphit wrote:

    Get Ready! Apple will enter search in 2014. iFind or iSearch ™ coming…

    Apple will be over $1,000.00 very soon. Hang in there and watch the fireworks. If you don't believe me. I'm the one that posted "Get a Mac." before Apple told the world.

    Disclosure: Long since 1997.

    Hint: Siri "Forget Google!" Charge 5% vs Google crazy monopoly fees for Ads.

    Apple makes money on hardware & Software

    Google makes NO MONEY on hardware and gives away the software

    Apple will enter search. Watch and learn.

  • Report this Comment On February 09, 2014, at 3:17 PM, tkell31 wrote:

    Google is growing, Apple is not. Does it get any simpler than that?

  • Report this Comment On February 09, 2014, at 3:30 PM, Mathman6577 wrote:

    A few glaring things missing from the article. Much of Google's weaknesses were not mentioned and none of Apple's recent innovations were skipped.

    Google weaknesses:

    1. Operating losses in mobile hardware ~ $250 million a year.

    2. Needed to shed Motorola at a paper loss of $10B less than 2 years after buying it (inability to effectively manage a hardware operation).

    3. Unethical executives --> buying jet fuel at a discount from the government for travel on personal business at taxpayer expense (if Apple did that imagine what the headlines would read?).

    4. Sales from "innovations": Google Glass + Driverless car = zero. Apple iPhone + iPad + Mac + iPod = $88B (one quarter)

    Recent Apple innovations:

    1. 64-bit technology in smartphones for the first time.

    2. Fingerprint sensor (will become useful in cybersecurity and mobile payments someday)

    3. Adding motion coprocessor to iPhone.

    4. Retina display for iPad.

    5. Improved battery capacity.

  • Report this Comment On February 09, 2014, at 4:14 PM, st0815 wrote:

    "Yes, they make so much money from ads, but what happens when people start trying other search engines?"

    That's the thing: then Google gets ad revenue via maps, via Android, via Chrome, via Google Docs ...

    "Unethical executives [...] if Apple did that imagine what the headlines would read?"

    They'd read "Monitor appointer as part of the eBook law suit". They'd read "under investigation for illegal recruitment deals with competitors". That sort of thing.

  • Report this Comment On February 09, 2014, at 6:19 PM, Mathman6577 wrote:

    st0805: The eBook monitor is a crony of the judge who is biased against Apple (she even said she was predisposed to rule against Apple). You are comparing Apples (ha ha) and Oranges. Illegal deals probably apply to Amazon but since Bezos is a crony of the government nothing will happen.

  • Report this Comment On February 09, 2014, at 8:04 PM, dhuddle wrote:

    I've read that Google gets 86% of its revenues from Search - that isn't "diverse" - just the opposite. If Apple started a search engine (or used Bing and branded it 'Apple", as Yahoo has branded the Bing engine), and made it the default for IPhones and IPads, it would have 15% of all searches within a month. I honestly don't know why they don't do that. Doubt it? Research how many customers Google Maps lost when Apple made Apple Maps the default - the answer is 28%. As for Android, the "android" statistics are very misleading because there are versions that have been re-worked to exclude Google - example, Amazons version and most versions used in China. It also makes sense for Samsung to do its own version so it can reap the long-term "ecosystem" benefits. Google is also vulnerable to Facebook starting a search engine, as I think it will - Google is trying its best to cut Facebook's throat.

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