Carl Icahn Releases Apple Letter

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% in FY 2016 and 23% in FY 2017. While the UltraHD replacement cycle alone offers a compelling revenue opportunity, the opportunity is not limited to the sales of an UltraHD TV. Televisions are a centerpiece to the modern living room and thereby a promising gateway into the home for Apple’s growing ecosystem. Apple could sell UltraHD movies and shows through iTunes over the internet to the UltraHD 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.”

 

HomeKit and HealthKit

But like so many of Apple’s opportunities, an UltraHD TV is just one possible point of entry to a much broader overall opportunity, as the living room is just one room in the home and Apple’s growing ecosystem makes the entire home an approachable venue. For example, Apple’s recently released HomeKit, a framework in iOS 8 for communicating with and controlling connected accessories in a user’s home from the iPhone and Apple Watch. The point here is, when considering the overall ecosystem, the iPhone and the Apple Watch become control devices for both the television in the living room, as well as the lights in the living room and throughout the entire house, and the lock for the front door, the thermostat, the alarm system, etc. You said publicly that you enjoy using your Apple Watch as a remote control for your TV, and we look forward to joining you. But we also assume you will soon enjoy using your Apple Watch to control many more devices in your home. The recently released HealthKit platform represents another similarly large opportunity, and while the details of the business model are still unclear, just as they are for the home category, the degree to which both could impact their respective venues is immense. At a minimum, these new efforts in Health and Home will strengthen the Apple ecosystem and drive product sales of the Apple Watch and iPhone. Though it is likely Apple will monetize HomeKit and HealthKit in some way going forward, we have not included any revenues from these emerging platforms in our forecast for the next three years.

 

Apple Pay

As the home represents one compelling category for Apple, payments represents another. Apple Pay will launch in October 2014, and while we expect limited financial impact in FY 2015 as retailers upgrade their infrastructure to incorporate the requisite near-field communications technology (NFC), we expect a more meaningful contribution in FY 2016 that accelerates into FY 2017 and the following years. We estimate that, based upon Apple Pay’s rumored fee of 15 bps of all spend on credit and debit cards (U.S. card spend was $4.2 trillion in 2012) and merchant deployment of NFC reaching 80%+ in 2017, Apple in the U.S. could generate revenues (also equivalent to gross margins, as the variable costs are de minimis) of $2.5 billion in FY 2017 if it reaches 30% market share of all spend on U.S. credit and debit cards. The potential in the U.S. and internationally over a longer term is much larger. Apple, dominant in the premium market, has customers who spend more on average than its peers, and it is therefore unusually well positioned to succeed with Apple Pay where others could not.

 

Conclusion

To be totally clear, this letter is in no way intended as a criticism of you as CEO, nor is it intended to be critical of anything you or your team are doing from an operational perspective at Apple. Quite to the contrary, we could not be more supportive of you and your team, and of the excellent work being done at Apple, a company that continues to change the world through technological innovation. The intention of this letter is to communicate two things to you: (1) given the earnings growth we forecast for Apple, we continue to think that the market misunderstands and dramatically undervalues Apple and (2) the excess liquidity the company continues to hold on its balance sheet affords the company an amazing opportunity to take further advantage of this valuation disconnect by accelerating share repurchases. As mentioned before, we thank you and the Board for being receptive to us when we last communicated our perspective regarding the company’s valuation and requested more share repurchases. It is our understanding that you solicited feedback from various large shareholders concerning our previous request, but we don’t think anyone would deny that we were a key influence with respect to your previous decision to increase share repurchases. We thank you for being receptive to us and other large shareholders, all of whom are investment professionals offering advice concerning an investment decision, as the decision to repurchase shares is in effect the company making an investment in itself. And given the size of our investment and our proven track record with respect to public equity investing, we hope you will be receptive once again. Between January 1, 2000 through September 30, 2014, an investment in the stock of Icahn Enterprises L.P. (NASDAQ: IEP) had an annualized gross return of 21.5%. The Sargon Portfolio (a designated portfolio of assets co-managed by Brett Icahn and David Schechter within the private investment funds comprising Icahn Enterprises’ Investment segment, subject to the supervision and control of Carl Icahn) has generated annualized gross returns of 36.5% since its formation on April 1, 2010 through September 30, 2014 with $6.6

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