1 Wall St. Billionaire Says Apple Stock Is Worth $216, And He's Only Slightly Wrong

Source: Twitter. Tweet is from 2013.

Investing is much like baseball, an activity where being above average still involves a depressing amount of failure. Average three hits in every 10 at-bats over a career, and you're in the Hall of Fame. In investing, if six in 10 stock picks beat the market, enjoy your retirement.

The point is, in both disciplines, even the very best are wrong a lot. Sometimes you swing for the fences and simply come up short. In this context, Wall Street billionaire and activist investor extraordinaire Carl Icahn's recent claim that Apple (AAPL 1.27%) stock is worth $216  definitely falls short of a home run. Here's why.

Apple EPS on the up-and-up
Last week, Icahn published an open letter aimed at his Twitter followers, which again calls for a much higher price for Apple stock.

This is just the latest missive from Icahn arguing that Apple shares remain patently undervalued even as they have more than doubled since late June 2013 (to over $120).

AAPL data by YCharts.

Icahn disclosed his stake in Apple via Twitter in August 2013, and stated in his post last week that he has yet to sell a single share. He also used the post to revise upward his target share price for Apple to $216 -- not next year, but today.

This upward revision is based on Icahn updating his fiscal 2015 earnings per share estimate for Apple from $9.60 to $9.70, an estimate he arrived at by adjusting his tax rate assumptions for the company's international cash. Using President Barack Obama's recent proposal to tax repatriated international earnings at 19%, Icahn assumes a 20% repatriation tax, instead of Apple's effective tax rate of 26%, which basically pumps up his financial model's fiscal 2015 EPS estimate for the company by $0.10.

Although Icahn's estimate sits well above the average analyst estimate of $8.58 for fiscal 2015, he makes a compelling case for this higher earnings figure in his letter. However, it's where Icahn takes his analysis next that makes his $216 target wildly optimistic.

From undervalued to overvalued
Icahn noted that under his assumptions, possibly problematic as they might be, Apple stock is trading at a huge discount to that of the broad market.

Source: Carl Icahn Feb. 11, 2015 letter. 

Even though Icahn's EPS estimate might prove a tad rich, it's impossible to overlook the fact that Apple clearly trades at a real discount to the broad market after backing out its huge cash hoard. That's why, even as Apple shares have soared of late, analysts such as myself have continued to make a bullish case for the stock. Apple grew EPS nearly 50% in its most recent report. Although similarly outsized performances aren't likely to continue, this does support the notion that Apple remains capable of growing at above-average rates in future years.

Icahn made the case for a host of new product assumptions (Apple Watch, Ultra HD-branded TV, etc.) that he believes will drive Apple revenue growth of 20% and EPS growth of 30% in both fiscal 2016 and 2017. This is where things get problematic.

Apple Watch will go on sales in a matter of months, and we know the tech giant has people working as secretly as possible on items such as TVs and automobiles. However, other than Apple Watch, other new product categories and their possible financial impact remain far over the horizon for Apple and its shareholders. Although, if Apple were to launch a genuinely game-changing product or two, then these assumptions certainly could prove correct, or even conservative.

However, does that still-untapped growth potential deserve to be largely baked into Apple's current valuation? Given the level of uncertainty, probably not.

Apple is unquestionably undervalued. Simply applying the market-average P/E multiple to the average analyst fiscal 2015 EPS estimate of $8.58 yields an implied stock price of over $145, and there's a case to argue Apple does indeed deserve a somewhat above-average multiple considering its moderately above-average growth potential in the years ahead.

Nonetheless, Icahn's recent claim that Apple stock is worth $216 per share should be simply too rich for any reasonable investor's tastes today.