Apple Inc (NASDAQ:AAPL) has been at the center of attention this week after activist investor Carl Icahn penned a letter to CEO Tim Cook, urging a larger share buyback and lending support to new product efforts in televisions and autos.
Highlighting a forecast of earnings growth of 40% this year, Icahn suggested AAPL shares are worth $240 today — making buybacks an attractive use of company cash.
Icahn has pressured Cook before into raising its buybacks and AAPL already boosted its capital return program in its last earnings release. Considering that the bulk of the company’s cash is held offshore and would thus be subject to U.S. taxes if repatriated, don’t expect an effusively positive response.
Shares are currently trading near resistance from the February/April double top closing high near $132.50. Can AAPL shares break out and rip higher towards Icahn’s target? I think they can.
But first, we could see some near-term weakness that presents newcomers with an attractive entry point as the initial response. The key stumbling block is likely to come when the mainstream financial media finally wakes up to discover that the new Apple watch is a flop. If it were faring well, AAPL would already be crowing about “record sales,” and there would be an undeniable buzz. They haven’t, and there is not.
A miss in this V1 product is virtually inconsequential to Apple’s current bottom line, as more than 70% of the company’s results stem from the iPhone. But it will be a blow to the company’s prestige, and should be worth at least a few bucks off the price as investors digest Watchgate. I am very interested to see if the public adulation of chief designer Sir Jonathan Ive ticks lower, so to speak.
Moreover one of the justifications for Icahn’s price target — an AAPL television product — was handed an embarrassing setback Tuesday when the Wall Street Journal reported that executives dropped plans for a 4K ultra-HD unit more than a year ago.
Longtime Apple super bull Gene Munster at Piper Jaffray was forced to admit that he no longer believes the company has a big-screen set in the works — something he has been pounding on the table about for years.
The other big initiative mentioned by Icahn is the so-called “iCar” — the battery-powered, semi-autonomous vehicle subbed “Project Titan” within Cupertino. As I mentioned recently on Twitter, the company is busily hiring battery technology talent — looking for a way to out-innovate on energy capacity.
Any product launch here is years away, but if AAPL can pull it off, the potential rewards would be enough to move the needle in a way the Apple Watch simply cannot: Icahn estimates the market for new cars is worth $1.6 trillion, four times the size of the smartphone market. He’s looking for an Apple-branded car by 2020, something that could be facilitated by rumors Apple is taking a stake in Fiat Chrysler Automobiles NV (NYSE:FCAU).
Towards the end of the year, it’ll be all about whether the updates to the iPhone 6 and 6s — likely to center on the addition of the “force touch” pressure sensitivity and haptic feedback — will generate as much buzz and excitement as the debut of the first large-screen iPhones did last year. Other updates should include an upgraded camera, structural reinforcement and a faster processor.
Apple’s designers have always found a way to differentiate the outward appearance of iPhone models from year-to-year to encourage annual upgrades; and I don’t see any reason to doubt them this time. There are reports the new phones could launch as early as August, which means they could be unveiled at the upcoming developers conference in June.
Any weakness in the 5% to 15% range between now and then should be bought.
Research: Anthony Mirhaydari
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Check out his Top Stock for 2015 here.
