Apple Inc. (AAPL): Why Carl Icahn Dumped Apple Stock

The hits just keep coming for Apple Inc. (AAPL) stock holders.

Apple AAPL stock

After a terrible miss in its fiscal second quarter earlier this week, shares are down 2% on Thursday on word that activist investor Carl Icahn (and possible future Treasury Secretary, according to GOP presidential contender Donald Trump) fully exited his position in the company, pushing shares deeper into late February territory.

This, after pushing the company’s debt load from $35 billion to just shy of $80 billion and earning himself hundreds of millions in the process.

The one-time momentum favorite, hedge fund hotel and single-most important stock in the market is now down more than 14% from its high two weeks ago and is down nearly 30% from Apple’s May 2015 highs.


Icahn famously dubbed his long AAPL position a “no-brainer” a couple years ago saying investing in Apple is how good investors make money. His bullish stance was based on a “promising moment” for the company on the rise of 4K/Ultra HD television (the old Apple TV hope) and the “compelling opportunity” in wearable devices.

The kicker was an overcapitalized balance sheet, which Icahn pressed for increased leverage and the return of capital to shareholders.

Why did he sell? Here’s how I recapped AAPL’s results a couple days ago (emphasis mine):

“Earnings came in at $1.90 per share (vs. $1.97 expected) for an 18.5% decline from last year while revenues came in at $50.6 billion (vs. $52.2 billion expected) for a 12.8% decline from last year. Profitability declined as well, with gross margins at 39.4% vs. 40.8% last year.

There was a big drop in iPhone shipments to 51.2 million vs. 61.2 million last year — the first ever year-over-year drop — as well as weak iPad (10.3 million vs. 12.6 million) and Mac (4.0 million vs. 4.6 million) shipments. China revenue, a recent point of concern, was weak as well at $12.5 billion vs. $16.8 billion last year and $18.4 billion last quarter.

Hype was building for the upcoming release of the iPhone 7 later this year, but with reports of only a modest update retaining the same form factor (removal of headphone jack, adding a second speaker, better camera, and bigger battery) ahead of a possible all-glass iPhone 8 next year, much of that has been deflated.

Waiting more than a year for an all-new iPhone not only gives competitors an opening to capture market share, but it keeps investors waiting for that big positive catalyst. Based on the drop in shares, folks simply don’t have the patience with CEO Tim Cook and his team in Cupertino.”

Icahn admits China is the major catalyst here.

“You worry a little bit — and maybe more than a little — about China’s attitude,” Icahn said during CNBC program Power Lunch. “… (China’s government could) come in and make it very difficult for Apple to sell there … you can do pretty much what you want there.”

The earnings call did nothing to turn spirits around, with Cook admitting that the smartphone market was “not growing.” Meanwhile, analysts wondered aloud if the low-price iPhone 5 SE could result in lower average selling prices for iPhones in general and thus weigh on overall revenue growth.

If that sounds familiar, it should — that’s similar to what happened to the iPad after the cheaper iPad Mini debuted in late 2012.

With more than 160 hedge funds long AAPL, according to Goldman Sachs, the question is who will sell next?

Edge Pro subscribers are enjoying a 200% gain in their May $107 AAPL puts first recommended on April 18.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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