Source: Apple.

Billionaire fund manager Carl Icahn has recently published his newest letter to Apple (NASDAQ:AAPL) management, which basically comes down to a major idea: Apple stock is massively undervalued, so the company should accelerate its stock buyback program to capitalize on the opportunity to repurchase stock at convenient prices.

Mr. Icahn owns a large position of nearly $6.3 billion in Apple stock, so his interest in this matter is not purely theoretical by any means. Icahn is putting his money where his mouth is, and he is one of the most successful investors around; so looking at the rationale behind his thesis could be quite enlightening for investors in Apple stock.

Is Apple massively undervalued?
Carl Icahn and his team calculate that Apple stock is worth $240 per share. This would mean a massive upside potential of nearly 85% versus a current price in the neighborhood of $130. This is a big part of his thesis, because undervaluation is arguably the best reason to accelerate share buybacks.

Icahn estimates that Apple will make $12 in earnings per share during 2016. Applying a multiple of 18 times earnings to those figures leads to an estimated value of $216 per share for the business. In addition, Mr. Icahn calculates that Apple will have $24 per share in net cash, which leads to a total estimated total value of $240 ($216 + $24) when adding the value of the business plus its net cash position.

In his letter, Mr. Icahn compares Apple's valuation with the valuation the market is assigning to the broad S&P 500 Index, and he finds that Apple is materially undervalued: "When we compare Apple's P/E ratio to that of the S&P 500 index, we find that the market continues to value Apple at a significantly discounted multiple of only 10.9, compared to 17.4 for the S&P 500, awarding the S&P 500 with a 60% premium valuation to Apple."

On growth and valuation
Arguably, one of the main reasons why Apple trades at a discount valuation versus the overall market is the fact that the company depends heavily on the iPhone when it comes to sales and profits: Almost 70% of total revenues came from the iPhone segment during the last quarter.

iPhone sales are truly booming. Total revenues in this segment grew 55% year over year in the March quarter, reaching $40.3 billion. On the other hand, product concentration is always a source of risk in the long term, especially in such a dynamic and always-changing industry like consumer electronics. If iPhone growth slows down because of market saturation or increased competitive pressure, then Apple could take a considerable hit.

On the other hand, Mr. Icahn believes investors are underestimating Apple's growth prospects, and this is the main reason why the stock is undervalued. In his own words:

It may be difficult for some to fathom (only because Apple is already the largest company in the world), but Apple is very much a long term growth story from our perspective, which is exactly why we believe the company's shares should trade at a premium multiple to the S&P 500, as opposed to the S&P 500 trading at a 60% premium to Apple.

Icahn believes Apple will enter the TV and automobile industries over the middle term, and these could be powerful growth drivers for the company. It's hard to tell what Apple's next move will be, or how much these potential new markets could move the needle in terms of overall revenue growth. However, there are strong reasons to believe Apple could sustain above-average growth rates in the coming years.

To begin with, there is no sign of slowdown when it comes to the iPhone. The new iPhone 6 and iPhone 6 Plus models are particularly strong from a competitive point of view, attracting a higher rate of switchers than previous iPhone models. Also, demand from emerging markets is particularly encouraging, as iPhone sales grew 58% in those geographies during the last quarter.

Apple is the most valuable brand in the world according to different publications, and this is a major advantage when it comes to both pricing power and successfully entering new product categories. Also, recent launches such as Apple Pay and Apple Watch prove that Apple is not resting on its laurels when it comes to growth and innovation.

It's almost impossible to tell what entering categories such as TV or automobiles could mean for Apple. However, Carl Icahn could be spot on when it comes to the company's overall growth prospects and attractive valuation.

Putting the money to work
Apple generates far more cash than it needs to reinvest in the business. Free cash flow in the first two quarters of fiscal 2015 was $47.2 billion, a 44% increase versus the same period in the prior year. The company is increasingly allocating capital to buybacks: Apple has recently increased its share-repurchase authorization to $140 billion from the $90 billion level announced last year. From the inception of its capital return program in August 2012 through this March, Apple has returned more than $80 billion to shareholders via buybacks.

Interestingly, management seems to agree with Carl Icahn on Apple's promising growth prospects and attractively valued stock -- hence the growing buybacks. In the words of Luca Maestri, SVP and CFO: "We're allocating the majority of the expansion of the program to share repurchases, given our strong confidence in the future of Apple and the value we see in our stock."

In spite of these generous capital distributions, the company continues accumulating tons of cash on its balance sheet. Apple has nearly $194 billion in cash, cash equivalents, and investments on its books. Even after deducting $40 billion in long-term debt and $3.8 billion in commercial paper obligations, this still leaves Apple with an enormous net cash position of more than $150 billion. This clearly shows that the company has more than enough money to take its share buyback program to even higher levels.

Carl Icahn's forecasts and assumptions regarding Apple are a matter of debate, but the company does look attractively valued considering its prospects. It also continues generating colossal amounts of free cash flow.

While Apple's buyback program is already quite big, there's no reason to believe it should not get even bigger. In fact, chances are that Apple will continue increasing its share buyback program for years to come.