3 Reasons Why Carl Icahn Doesn't Get Apple Stock

You have to hand it to Carl Icahn. He always knows how to make a splash, even if sometimes it seems like a belly flop.

The activist billionaire investor had plenty to say about Apple (AAPL -0.57%) on Thursday. The open letter to CEO Tim Cook offers plenty of praise for his recent performance, but naturally you're not an activist if you're simply cheerleading. 

Icahn still feels Apple should be more generous in deploying its idle cash. He also thinks the market isn't paying fair value for the company's stock.

In Icahn's eyes, Apple stock should be trading north of $200, more than doubling from here. That has been the big takeaway from Icahn's letter, but I want to hone in on the basis for his lofty price target. See, Icahn expects Apple to post sales growth of 25% in the new fiscal year that began earlier this month, with earnings soaring 44% in the process. That seems more than a bit ambitious given that analysts only see the consumer tech giant growing at roughly half that pace. Icahn then sees revenue and earnings climbing 21% and 30%, respectively, in fiscal 2016 and fiscal 2017.

Nice try, Icahn, but let's point out some of the reasons why those projections could be too optimistic. 

1. Analysts aren't perfect, but they're not stupid
Wall Street sees Apple revenue climbing 12% in fiscal 2015, with earnings moving 15% higher on a per-share basis. That's far removed from Icahn's targets. 

His numbers don't seem plausible. We've seen iPad sales shrink in back-to-back quarters, and iPod growth has been negative for years. This places a lot of weight on the iPhone and Mac, and neither category is growing even close to 25%, much less above it to make up for the slack elsewhere. 

Yes, the Apple Watch is coming and Apple Pay could be a game changer. It still won't be enough.

Let's look at Apple's sales and earnings growth in recent years.

Source: Yahoo! Finance, Apple. 

Now, it's easy to see that heady growth in 2011 and 2012 and think that Icahn could be on to something. If Apple was growing sales at a 45% clip in fiscal 2012 and 66% the year before that, with earnings rising even faster, why is it so crazy to call for 25% top-line growth and a 44% earnings gain? 

Let's talk numbers. Apple was a much smaller company at the time. That 66% surge in fiscal 2011 was the handiwork of ringing in $43 billion more in sales than in fiscal 2010. If Apple grows its sales by $43 billion in fiscal 2015 we would only be talking about a 24% surge in revenue. Oh, and that was with the iPad padding results in its first full fiscal year on the market. What's going to pad results this time around? 

Analysts who get paid well to cover Apple don't see that happening. The pros are conservative by nature, but not that conservative. 

2. Icahn is ignoring the current operating climate
There's a reason why Apple has grown sales in the single-digits over the past two years and is earning roughly as much today as it was in 2012. The competitive marketplace has taken its toll, and while no one denies that Apple is the class act in smartphones, PCs, and tablets, it faces stronger and hungrier competition now worldwide than it did just a couple years ago.

However, in an environment with Kindle tablets being sold roughly at cost, Android gadgetry flooding the market, and Xiaomi emerging as an Asian darling, can Apple sharply accelerate growth while at the same time widening its margins? That seems far too ambitious.

3. New products won't all be hits or incremental
Icahn talks up Apple Watch even though wearable computing has yet to find its audience outside of cheap fitness bracelets. He builds up the potential of Apple Pay, even though this is a transactional platform limited for now to the minority of new iPhone owners. Both platforms have potential, but not likely in the tens of billions a year that would be necessary to hit Icahn's optimistic sales targets for Apple as a whole.

Then there's TV. Icahn sees Apple selling 12 million UltraHD TV in the next fiscal year (fiscal 2016) and another 25 million in fiscal 2017. We know that Apple has been working on a full-blown TV solution. Steve Jobs was talking about this before he died three years ago. However, selling bulky $1,500 TVs isn't the same as the pocket-sized smartphones and portable tablets that folks line up for every rollout. We also can't forget that iPads ate into Mac sales until the more recent trend with Macs eating into iPad sales. Are we sure this will be incremental? Apple will need to raise the bar on smart TVs that cost less than half that price, and if that will come with iPad or Mac features can we be sure that those categories won't be immune from cannibalization? 

Apple's future is bright. Icahn just needs to readjust his shades.