American businessman, activist shareholder and investor Carl Icahn has written a wide-ranging open letter to Tim Cook, Apple’s CEO, urging a share repurchase, suggesting its stock is undervalued, and has highlighted TV as a “large” market opportunity for the company.
With Icahn’s company, Icahn Enterprises, which holds some 53 million shares in Apple, forecasting “robust” per cent earnings growth of 44 per cent, 30 per cent, and 30 per cent respectively for the next three fiscal years, driven by strong revenue growth of 25 per cent, 21 per cent, and 21 per cent respectively, the letter details how it arrives at these forecasts by looking at Apple’s existing and potential product line.
In terms of TV, Icahn notes that while Apple has not announced plans for a TV set and may never do so, it believes there is good enough reason to expect the introduction of an Ultra-HD TV set in FY 2016. “We think television represents a large opportunity for Apple, one that reaches far beyond ‘the hobby that Apple TV currently represents. You recently stated, ‘TV is an area of great interest for Apple’ and we agree that it should be. As we highlighted in our previous letter, we believe UltraHD’s (ultra-high-definition television) superior picture quality in comparison to regular HD will drive a major TV replacement cycle as the price gap between them narrows.”
Icahn says it should also be noted that Reed Hastings, CEO of Netflix, has referenced UltraHD as a major catalyst for Netflix going forward, suggesting that while this is true for Netflix, Icahn believes it is also true for Apple. “Against the backdrop of this replacement cycle, FY 2016 represents an opportune time to introduce an UltraHD TV set. Therefore, included in our forecasts, we expect Apple to sell 12 million 55” and 65” TV sets in FY 2016 and 25 million in FY 2017 at an average selling price of $1,500 at gross margins consistent with the overall company. While we think adding a TV set to the Apple ecosystem would be meaningful from a financial perspective, we understand that you may choose not to do so, as you have wisely stated that ‘the toughest choices for Apple are what not to work on’” notes the letter.
“But, even if Apple chooses not to offer a TV set, our earnings estimates would only be revised for FY 2016 and FY 2017, and the impact is not significant enough for us to question using a P/E multiple of 19x our FY 2015 EPS for Apple today, especially since, even without a TV set, our forecast shows EPS growth of 19 per cent in FY 2016 and 23 per cent in FY 2017. While the Ultra-HD replacement cycle alone offers a compelling revenue opportunity, the opportunity is not limited to the sales of an UltraHD TV,” suggests Icahn.
According to Icahn, televisions are a centrepiece to the modern living room and thereby a promising gateway into the home for Apple’s growing ecosystem. “Apple could sell Ultra-HD movies and shows through iTunes over the Internet to the Ultra-HD TV since cable companies will likely be slow to upgrade their expensive linear infrastructure, as one example of an incremental opportunity. Another is the user interface of television, which you humorously (but accurately, in our opinion) described as being ‘stuck in the 1970s’,” he says.