"But I do think [Apple] is a no-brainer because I think it is almost better than it was when we talk about it in certain ways." -- Carl Icahn on Jan. 8, 2015.
So, yes, activist investor and infamous C-suite irritant Carl Icahn kind of likes Apple (AAPL 0.64%).
And Icahn has every reason to sing Apple's praises of late. After all, his stake in the world's largest publicly traded company has surged by nearly 60% since he first disclosed his position in August 2013.
A series of recent appearances in the business media have made it clear Icahn believes Apple stock has room to run in the months ahead (I tend to agree with him on the matter). So let's quickly review three of the main reasons Apple remains a "no-brainer" in this Wall Street billionaire's eyes.
1) Apple's rock-bottom valuation
Sometimes the best investment ideas are the simplest. In that vein, it hasn't escaped Icahn's attention that Apple stock remains pretty darn cheap, even after its recent rally.
|
Apple* |
S&P 500 |
% Difference | |
|---|---|---|---|
|
P/E Ratio |
12.6 |
19.3 |
53% |
Sources: Apple IR and Robert Schiller.
For full transparency, the asterisk attached to the Apple metric reflects the company's market capitalization after deducing the roughly $155 billion cash and investments from it, which has been a key piece of Icahn's valuation analysis.
It's important to note that the P/E multiple is a backward-looking metric, which matters here for a number of reasons. First, Apple undoubtedly tapped some of its domestic cash reserves to fund its ongoing capital return program during the current quarter. However, given the absolutely massive quarter Apple is likely to report, that should be more than negated by an incoming tsunami of cash. Likewise, Apple will probably set a new earnings record in its next report. All told, this strongly suggests Apple is even more undervalued relative to what is most likely ahead.
Suffice it to say, Apple is cheap on an absolute and relative basis.
2) Apple's exceptionally lucrative ecosystem
Icahn is also fully aware of the tremendously favorable competitive dynamics of Apple's uber-sticky ecosystem. In a number of his recent media appearances, the investor has likened individual iPhone users to "an annuity."
While this overstates the company's customer loyalty to a certain extent, it is well documented that Apple users tend repurchase Apple devices more often than not once they enter the ecosystem. This demonstrates the value of Apple's highly controversial closed-source hardware and software strategy.
As the model goes, Apple device owners spend money on content such as movies, TV shows, music, and apps that are nontransferable to Google's Android or other outside operating systems. As such, when it is time to buy a new device, the prospect of losing this valuable content and features help tip the purchasing decision in Apple's favor time and again. This has made Apple into the world's No. 1 cash-producing business.
Source: Twitter.
.
3) Apple's massive cash hoards
Although I've already mentioned its massive, and likely expanding, cash and investments surplus, Apple's war chest represents another key reason Icahn loves Apple.
Although much of it remains stuck in the coffers of Apple's international subsidiaries, the company's truly gigantic cash and investments stockpile gives it unparalleled flexibility from a financial engineering standpoint. Icahn has repeatedly called Apple to take a more aggressive approach to deploying its cash for shareholders' benefit. Although it's not entirely clear how the mechanics would operate, Icahn has been a vocal advocate of Apple offering as much as $100 billion for its stock as a means of further boosting earnings per share.
Big things around the corner for Apple
Apple reports its fiscal 2015 first-quarter earnings on Tuesday, Jan. 27, and you can expect the company to hit fresh records for almost every key metric it reports.
As we head further into the year, there are still plenty of reasons to like Apple at or around its current level. Carl Icahn certainly does. And like him or hate him, Icahn made himself into one of the richest billionaires on Wall Street by being right far more often than he's wrong.
