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Carl Icahn to Raise Stake in Apple: Should You Invest Too?

Activist investor Carl Icahn has again made headlines with his plans to buy "a lot more" shares of Apple Inc.AAPL , as per a CNBC report.

While Icahn has been a loyal Apple supporter for quite some time with about 55 million shares of the company, this time around the statement has sparked a lot of interest among investors.

This is because just a couple of days back, Icahn had released a video titled 'Danger Ahead' in which he stated - 'It's going to be a real bloodbath.' referring to the U.S. financial markets and warning investors that may be it's time to 'keep cash' instead.

The billionaire remarked he had hedged his portfolio sufficiently to minimize the damages that are likely to happen on account of the Fed's stance on a near zero interest rate, which is making investors go for high-yield debt bonds issued by highly leveraged companies.

In this scenario, with his plans to increase his stake in Apple, he gave a ray of hope to confused investors.

Icahn is known for his knack of investing in undervalued companies with a scope for decent growth. However, he is also known to influence management strategies, thereby having the potential to impact market sentiments. This is apparent from the fact that Apple shares inched up 1.14% in yesterday's trading session.

Icahn has already added about $3.4 billion to his wallet, since he invested in Apple back in 2013. At present, his stake in Apple would be somewhere around $5.8 billion.

What Does Icahn See in Apple the Market Doesn't?

"I don't see how you can compete with Apple, because of this ecosystem they've built" says Icahn in explanation of his stance on Apple.

The veteran has been saying for the past few months that Apple stock is grossly undervalued. In May, Icahn had written an open-letter to Apple CEO, Tim Cook stating that Apple's stock should have been valued at around $240 at that time. However, the target price was based on Apple's possible entry into television and automobile markets.

The letter emphasized that Apple's venture into new markets (like Apple Watch, Apple Pay, Homekit, Healthkit, Apple Music, Apple TV and others) are strengthening its ecosystem considerably for an unmatched user experience.

Icahn had also urged Cook to increase the company's share repurchase in addition to investments in innovation to make a better use of its cash pile.

It's All About Numbers!

Apple, even after falling significantly from its 52-week high position, is still the most valuable company of the world with a market cap of over $700 billion.

But more important is the company's potential to drive growth. Apple delivered phenomenal growth of over 44% in earnings and 33% in revenues in its third-quarter fiscal 2015 results. And this was despite the weakness in the Chinese economy (Apple's second largest market), to which it seems immune !

Additionally, according to our model, the company's long-term growth estimate of 14.1% is better than the industry's expected growth rate of 11%. Also, Apple's PEG ratio of 0.85, which compares favorably with the industry's figure of 2.01 indicates the further possibility of an upside going ahead. Positive estimate revision for this year's earnings over the last 7 days makes the stock even more attractive.

Bottom Line

Apple's solid business model, technological prowess and the sheer size of resources are what Icahn is betting on despite the downward-spiraling economy. As such, Icahn considers the present dip in prices as an opportunity to add position.

We believe that over the past seven years, the company has positioned itself well to maintain position even amid rocky market conditions.

As Icahn remarked in his letter to Cook, 'Apple has clearly demonstrated a track record of excellence and success when entering new categories. We expect this to continue with the Apple Watch, the television, and the car, and the world will look back on today's undervaluation as a fascinating example of market inefficiency'.

May be Icahn has stretched the target price a bit, but even then the company has enough steam left to drive growth.

Currently, Apple carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the broader tech space include Amazon.com, Inc. AMZN , eBay Inc. EBAY and Blue Nile Inc. NILE . All these stocks carry a Zacks Rank #2 (Buy).

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APPLE INC (AAPL): Free Stock Analysis Report

AMAZON.COM INC (AMZN): Free Stock Analysis Report

EBAY INC (EBAY): Free Stock Analysis Report

BLUE NILE INC (NILE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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