Carl Icahn is like an acquaintance that you never hear from until you have something that they need. The modus operandi of those types is to show up, schmooze, and then tee you up for the obvious request that you knew from the outset was coming. Carl Icahn is one half that acquaintance and the other half your nightmare. He is the Czar of activist investing and is of the ilk that shows up when you are vulnerable and holds your head down until you succumb. He is unpretentious and does not beat around bush. He shows up, buys up enough of a stake in your company, states his claim and then goes for broke. But, unlike the aforementioned acquaintance and through Icahn Enterprises L.P. (IEP), investors are afforded the chance to share in Icahn's greed. Icahn Enterprises returned a lofty 129% in 2013, which clearly indicates that Icahn barks to bite not to scare. In the matter of Icahn versus Apple Inc. (AAPL) I, however, believe that Icahn is putting Apple in a conspicuously precarious position that might benefit him but ultimately be disastrous to Apple. Not that he cares but I thought I should point it out anyway.
Rock #1: Carl Icahn
Remember the reference of the acquaintance who only calls you when they need something? Icahn needs something from Apple and instead of asking nicely he wants to take it and take it now. Icahn has snapped up about $4B worth of Apple Inc.'s stock, which at a market cap of about $466B is a relatively puny percentage. He is using this small percentage to rattle the trees hoping that whatever fruit he can shake off will fall into his basket. Here is what he sees:
- An insane amount of available and growing cash reserves
- A stock price that by his estimates does not reflect the value of the company and
- Valuation ratios and estimates that have dropped even lower than the stock
He states his goal rather simplistically:
- Aggressive buyback program to reduce the amount of shares outstanding and boost the stock price in the face of slowing revenue growth and flat net profits
He calls what he really wants a service to the shareholders but remember that he is one of the bigger shareholders and has his eye on Apple's cash. He deems the $100B dividends and share repurchase program inadequate and would like for Apple to:
- Accelerate its buyback program which inherently reduces supply, increases or hold demand steady and consequently raise the price of the stock
- Increase dividends payments or do a one-time exceptional payment to current stockholders which as you guessed it will greatly benefit him
- Lastly, reducing the number of stocks outstanding will improve his ownership percentage and consequently improve the PE, EPS and other rations that help both the intrinsic and relative valuation of the stock
Icahn's attempt at skimming money from Apple is akin to a coup. He represents Icahn Enterprises and has every right to act in his best interest. But, his maneuvering is the kind of nuisance that forces management to be looking over their shoulders and in the rearview mirror rather than looking at the road ahead.
In-between Rocks: Apple Inc.
There is proof that cracks are starting to appear in the seams of Apple Inc.'s otherwise runway success in the premium cellphone segment. The revenue juggernaut has slowed down and there are fears that growth might not come back soon enough. The divergent forces that previously only helped demonstrate the brilliance of Apple Inc. are finally starting to have a quantifiable negative impact on financial results. After reporting record breaking holiday sales the stock fell sharply today by $44 or 8% to $506.50. While revenue grew by 5.6% net profit came in flat at $13.1B and full year profit drop of 8%.
While other companies will pay to have these profit and revenue levels, they signify a stagnation that makes investors increasingly skittish about the growth prospects of Apple. Flat guidance for Q2 compared to previous year is indicative of the fact there will be no new products or that new products are not expected to significantly change overall revenue. It could also mean that the market is saturated in key areas or that competitors are that much better.
The real conundrum for Apple Inc. is to keep its identity in the face of current challenges. Usually Apple's motivation is to be the best not the first. Even when Apple acquires outside companies it usually carefully integrates them so they can seamlessly work with its other services or products. The challenge to remain Apple and also to move quickly to catch up or beat competitors is making it increasingly hard for Apple to keep its luster with its investors but most importantly the investment community.
Rock #2: Competition and Speed to Market
Google (GOOG) is delivering on Microsoft's (MSFT) Devices and Services strategy in an "Apple-esque" manner. From Nest to Deepmind and to Boston Dynamics, Google's recent acquisitions raise expectations and tease the mind with the infinite possibilities of the fusion of robotics and artificial intelligence. Add these to prior projects like Google glass and driverless cars and all of sudden Google seems to be doing what was expected of Apple. While android continues to gain market share Google seems to be getting ready for life after search/Ad revenue.
Samsung (OTC:SSNLF) on its part continues to be restless with new product launches and rapid entry into new/every product segment. As these companies juxtapose with Apple for attention, products and market share their success exacerbates any perceived complacency that Apple may have in the marketplace.
Apple will not release an experimental watch like Samsung did. It would also not release the Google glass, which to a great extent was a prototype requiring user feedback both in usability and design. Apple has had its fair share of acquisitions but unlike its competitors, Apple insists on fully integrating new acquisitions into its products and services rather than using them as independent extensions of its business. Rock number two for Apple is the desire to stay true to itself while its competitors throw everything at the wall and keep what sticks.
Recent results have not been flattering and with a declining stock price and flattening revenue you can expect to hear even more from Carl Icahn. As Icahn goes on his campaigns to squeeze value out of the company and as cellphones and tablets saturation/maturation continue to squeeze Apple from the inside, the need for a breakthrough device only gets higher. On the outside Apple must recognize the real threat that is posed by Google, Samsung, Microsoft (MSFT) and others. The pace of change in technology is breathtaking and it is not unfathomable to imagine that Apple might miss a trend or two. If I were to initiate a stake in Apple's stock today it will be exclusively for the fact that in the current climate I strongly believe Carl Icahn will be able to squeeze some concessions from Apple. Anything he gets from Apple will be of great long-term disservice to Apple and to investors because it will be extremely disruptive. But like John Maynard Keynes states, "in the long run we are all dead". I am sure once he gets what he wants he will sell off and go focus on breaking up eBay if he is not done with them by then. Expectations are too high and Apple just does not have the time or the wiggle room to surprise the market as it did with previous products.