Netflix (NFLX +0.02%) saw its shares drop by 17% the day after reporting strong subscriber growth. Perhaps fueled partially by CEO Reed Hastings warning that there seems to be a lot of euphoria around the stock, and perhaps partially by a large sell-off from activist investor Carl Icahn and his Icahn Enterprises (IEP +0.50%).
Icahn has been very public about his stake in Apple (AAPL 0.04%) and his disagreement with CEO Tim Cook about how to handle Apple's huge cash stockpile. Do Apple shareholders need to worry about an Icahn-induced sell-off?
Difference in position
Netflix is a much smaller company than Apple. It was even smaller last year, when Icahn took his initial position, buying 10% of the company for an average share price below $60. In comparison, Icahn owns just 4.73 million of Apple's 908.5 million shares outstanding, or 0.5% of the company. That means much less influence on both management and share price.
Icahn had initially intended to use his position in Netflix to push Hastings and the board to consider a buyout from a company like Amazon.com or Microsoft in order to unlock shareholder value. Since then, however, Netflix has surprised Icahn and investors with strong financial results and subscriber growth. Icahn sat back and collected his winnings by selling half his stake this month.
With Apple, Icahn again intends to practice his brand of activist investing. He wants Tim Cook to exercise an immediate $150 billion buyback funded through debt. Although it appears Cook is hesitant to take such a drastic action, I don't believe Icahn is about to sell his shares. In fact, he'll likely increase his stake in the company.
Why Icahn isn't selling
Icahn's Netflix sale was more than 12 months after he took his initial position. There's a significant tax difference between long-term (more than 12 months) and short-term capital gains. Icahn's Apple position is still only a few months old. He's probably not going to sell before 12 months with millions of dollars in capital gains on the line.
Moreover, Icahn still thinks there's lots of value in Apple shares. Currently trading around his target price for an Apple buyback, $525, Icahn must believe shares are still undervalued. He thinks a $150 billion buyback, coupled with continued earnings growth, could lead shares as high as $1250.
The biggest reason Icahn won't sell, however, is that he's considering a proxy fight to unseat some board members if he doesn't get his way. As an Apple shareholder, I believe the company would benefit from a member on the board with the financial acumen of Icahn. Apple has more cash than it knows what to do with, and needs to be able to make smart investments, which includes buying its own stock.
No, Icahn won't be selling anytime soon, and any fear priced into Apple shares about an Icahn-induced sell-off will surely dissipate over time. I expect shares to climb regardless of how this story unfolds, as even "bad" news at Apple is good for shareholders.
It's hard to bet against Icahn
Icahn Enterprises seems to be on the right side of nearly every big-business story in 2013: Netflix, Herbalife, Dell, Apple. Icahn's public disclosures can cause huge movements in stocks like Netflix and Apple as investors follow in his wake. He has certainly proven he knows how to find undervalued companies.
But sometimes, nothing needs to be done to unlock value, as was the case with Netflix. The same may be true for Apple. The company has strong operations, is bringing in billions in revenue and profit, and its conservative money management isn't the worst thing in the world. Icahn has already made about $400 million on paper with his Apple position, and believes it's still a good buy. I do too.
