Activist investor Carl Icahn, a man synonymous with pushing companies to make changes that boost shares, is currently making headlines on all major financial news outlets. Icahn is hot on the trail of Apple (NASDAQ:AAPL) CEO Tim Cook. Currently owning a $1.5 billion stake in Apple, Icahn describes his position as a "large position" and is in fact using it to push for the expansion of Apple's current share buyback program. Anonymous sources cited by Bloomberg in a mid August report confirm that Icahn is aiming at a $150 billion share repurchase program. Bear in mind that this comes after Tim Cook's history making April announcement of a $100 billion share repurchase program that will run through 2015. A move that was prompted after David Einhorn, another activist investor, pushed for the same through a suit in February.
Beneath all the excitement and the recent rally that was for the most part fuelled by Icahn's positive tweets, there is a huge danger. Investors looking to go long on Apple should take care. Icahn's interest, as well as that of other activist investors looking to take a bite out of Apple, will compromise Apple's long-term prospects.
Promising product portfolio put to threat
iTunes radio may not be a huge threat to Pandora (NYSE:P) at the moment. However, Pandora's situation is opening the way for Apple. Despite addressing concerns of mobile monetization, as signaled by the 92% year-on-year uptick in revenue generated from mobile operations in the second quarter, Pandora is still deep in the red. Pandora's second quarter losses came in at $7.9 million, or 4 cents a share, compared with $5.4 million, or 3 cents a share, in the year-ago quarter. This widened loss happened despite an increase in the top line. Now Pandora is looking at accelerating new technologies to stem the loss. But before this comes to pass, Apple's iTunes radio would have made some headway. Not only does Apple have the money to push forward, but iTunes as is already has a bulging user base. This, coupled with current and potential iPhone users, gives Apple a definite edge.
Going forward, Apple will be able to leverage is user base to capitalize on a loss-making Pandora. The market share that it could gain from this should translate into big gains for shareholders.
Apple's redesigned iPhone, slated for September, could also gain immensely if the China Mobile (NYSE:CHL) deal comes through. In July, Apple's Tim Cook met with China Mobile's chairman Xi Guohua to negotiate a possible deal. While nothing is official yet, some of the previous obstacles that were blocking the deal have been overcome. Firstly, Apple's rumored mid-market phone could offer an incentive for China mobile, seeing that it avoided Apple's high end iPhone because of the high cost of marketing and subsidizing. More importantly however, Apple's new iPhone will have Qualcomm chips that can operate on China's networks. Beijing is also expected to grant 4G licenses by the fall of the year. While the 4G licenses are expected to be based on TD-LTE technology, rather than the more prevalent FDD-LTE, the new Qualcomm chips in the iPhone will handle both. With all these factors in play, there is a huge possibility of Apple reversing the 43% year-on year slump in China sales in the past quarter. And if this happens, confidence in China will be boosted; something that will be reflected through sustained rallies on the stock market.
However despite the promising products in Apple's pipeline, the Cupertino based big wig may fail to deliver in the long run. Carl Icahn's interests may be a hindrance.
Tradeoffs have to be made
Tradeoffs have to be made; at least that is what the late Steve Jobs taught us. In a now viral interview with CBS, Oracle CEO and Jobs's long time friend Larry Ellison publicly stated that Apple had no chance without Jobs. He referenced the time when Apple had Jobs and the time when it didn't. The trend spoke for itself; up and then down.
Apart from innovation, Jobs's stance on activist investors is what made the difference. Tradeoffs have to be made in order to build a name like Apple. It's a sacrifice that each shareholder must make. Give in the desire for buybacks and lumpy dividends, in exchange for sustained growth and gains on the stock market. To produce evolutionary, rather than revolutionary products, a lot of money is needed; Jobs knew this and for that reason, turned down calls for share buybacks and increased dividends. If Tim Cook starts burning through the cash pile at the will of Icahn and other activists, Apple's products will stop being disruptive, it will no longer be the pace setter. In the long-run, this will not only affect market share, but margins as well.
Remember the fable of the Goose which could lay golden eggs? The wise farmer picked one golden egg a day, each day building his wealth progressively. The greedy farmer on the other hand tore the geese apart hoping to find all the golden eggs inside.
You can't 'kill' the asset that gives you returns. This is what Tim Cook is letting activist investors do. Once the money goes, the product will lag behind, sales will wane and short traders will flock the scene like vultures circling a lion kill in the lush African Savannah. Tim Cook needs to take real care of activist investors; they pose an actual threat to Apple's long-term prospects.