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/ By Clive Minchom /
Carl Icahn yesterday sent out two Twitter posts applying his recently announced, and long overdue, arrival into the twenty first century by setting up his own Twitter account. His first tweet, mid-afternoon in the Eastern United States said simply:
“We currently have a large position in Apple. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come – Carl Icahn (@Carl_C_Icahn) August 13, 2013.”
Three minutes later in a second tweet he teased us all a little more:
“Had a nice conversation with Tim Cook today. Discussed my opinion that a larger buyback should be done now. We plan to speak again shortly – Carl Icahn (@Carl_C_Icahn) August 13, 2013.”
Twitter has not yet managed to bring down the theocratic dictatorship in Iran, nor has it solved any problems of poverty in the third world through crowd-sourcing of water projects, but in the “twinkling of a tweet” the cloud of negative sentiment that had been hanging over Apple on Wall Street for some time, even though it has been creeping up steadily in recent weeks from twin lows below US$400 (at the beginning of May and again at the beginning of July), vanished in a single gust of fresh air sending the shares upwards. They hit US$494.66 briefly before closing at US$489.57 – still up from US$472 at the opening or about 4%. In after hours trading too they have hung in there at just under US$495 signaling the Apple shorts may finally be scurrying for cover.
Notice, of course, that Carl Icahn did not say how much money he has invested in Apple, nor indeed did he need to; let’s assume though that “large” to him means at least US$1 billion. That amounts to just one quarter of one percent of Apple; hardly enough to normally matter if he intends to act as an aggressive active investor. Apple itself responded to the news later in the day through a spokesperson: “We appreciate the interest and investment of all our shareholders. Tim had a very positive conversation with Mr. Icahn today.”
Wall Street is a very serious business all about making money. However it is also full of morality tales, with heroes and villains, with evil corporate raiders and, sometimes, with “active investors” – like the knights in armour of old who went around on horseback in medieval times, seeking out companies to rescue from the ugly dwarves who hold them prisoner and only manage them for their own benefit.
Sometimes in real life, however such knights fall off their horses, like Sancho Panza tilting at windmills, and don’t really do much for the companies they invest in either. Bill Ackman, for example, has just been kicked off the board of directors at J.C. Penney despite his hedge fund owning 17.7% of the company after a number of public mis-steps that cost him the confidence of the Board.
In this case it seems likely therefore we can take Carl Icahn at his word, and that he is buying in because the shares are indeed cheap. He is also using his own money, which is in his favour, not just taking a piece of the action of his investors’ funds without a stake in the result. At 12 times earnings Apple shares are indeed cheap and they offer a nearly 3% dividend too. The company is also buying back significant chunks of its stock under a buy-back programme announced earlier this year to “deal with” its huge pile of cash that keeps piling up.
What is Apple Doing for Us Lately?
The question really though, as always, is where does Apple go from here, and that depends on how you view the company. For believers Apple is just getting started, with a solid product line of devices that speak to each other well now, with a happy, satisfied and loyal customer base, over 90% of whom are already using its latest mobile operating software, and with plenty of clever people on staff dreaming up new things that will, eventually, continue to delight and motivate purchase decisions by increasing numbers of people.
Disruptive innovation, they will state, is after all actually a discontinuous function, and one should simply not expect to change the world every five minutes – but change it we eventually will. After all, it took three years between the iPhone and the iPad, and both products were initially completely panned by most of the technology crowd the day they were launched, so what do they know?
To others, however, Apple is now “merely” a value investment and one, heaven forbid, actually paying dividends, causing immense semantic classification problems for some investors for whom “value” and “growth” or “technology” do not mix, or at least historically have not. The former Microsoft group of Apple haters has now been replaced largely by the Android crowd, all of whom are touting their own market share dominance, without looking at all at internet usage statistics which tell a completely different story, or at profits where Apple still harvests the lion’s share of the smart phone money. Or, by Samsung devotees, who do indeed take the rest of the smart phone profits with good products, but who keep praising the “one more inch for one more itch” of their own smart phone screens with equivalent, loyalist, messianic fervour, as the be-all and end-all of technology innovation.
The truth is however not at all so Manichean and we can all be a little more agnostic in how we look at all this. It is simply not a binary universe; Apple, Samsung, Google and, yes, even Microsoft and maybe Nokia too one day, though sadly alas probably Blackberry no longer, can all co-exist and make good money in the mobile and tablet connected universe, which continues to grow, if they all remain nimble. For Apple, new products are coming again this Fall and on into 2014 so Wall Street’s insatiable demands for instant gratification may therefore again, at least partially, be sated.
Apple’s cheap 12 times P/E ratio may therefore begin to look a blessing and an opportunity again, rather than a curse. Longer term, whether it is iWatches that will prevent you from having a heart attack, or iPhones that will drive your car, or iTelevisions that will cook your dinner is not quite yet the point; the direction itself is important now – and that seems to be up again.
A Restructured Management is The Key to Understanding Apple
The new iOS 7 mobile operating system, and Mavericks the latest version of OSX for the Mac, which are both being released this Fall, will now lay the technical and user foundation for all Apple’s future products coming in the next year or two.
We should not underestimate either that these are also only the first of a number of clear statements that are beginning to emerge from Apple again since what may have been, effectively, prevention of a creeping internal management coup in 2012.
This resulted in the departure from the company of former iOS development team leader Scott Forstall. His departure also occurred in the immediate aftermath of an embarrassingly premature launch of Apple’s revised mapping application Maps. As former White House Chief of Staff Rahm Emanuel once put it in a political context, Apple did not “waste” the crisis and used it both for a thorough management organization review and to separate itself fundamentally from Google in favour of its own long term commercial initiatives, even at some initial cost.
It takes time to redirect a company’s management, especially after the death of a founder, but one can reasonably infer that a number of product initiatives of his own that Forstall was taking at the time may have since been canned, and many things re-thought totally from scratch. In particular, the consumer dumbing-down of Apple’s desk-top operating system, OSX, that Forstall at one time was a clear champion of, perhaps in order to take charge over the desk top territory for himself, has now been thoroughly rejected.
Craig Federighi who was brought back to Apple in 2009 by Steve Jobs to revitalize OSX now manages both the mobile and the desk-top systems, which is an excellent idea. Recently also, Apple made another firm statement to its faithful by pre-announcing a new Mac Pro which is a completely revolutionary machine that will only sell in small quantities, but which is one that sets a very high bar for the breadth and scope of the company’s future technical ambitions. Since the ever seductive siren of the Enterprise remains in Apple’s sights, even if only on its own terms, this is a very smart decision.
Collaboration is the declared new approach inside Apple and it seems to be working. This was not, by the way, always Steve Jobs’ own approach: he loved to divide and to set up huge competitive frictions internally and is indeed famous for it.
But, now all these hardware devices, whether iPhones, iPads, notebooks, desk tops, also even – or perhaps especially – your car and whatever they may dream up next will have to inter-act with each other in increasingly complicated ways, ways that Apple has itself even sometimes stumbled over on occasion in the past, so the new Tim Cook approach may actually be a much better one.
Apple’s Product Development Programme
Tim Cook is clearly running the business for the long term. If he made a mistake in his first couple of years on the job it was to not sufficiently downplay expectations of the timing of potential new revolutions still to come. In response, market expectations of success then grew too great too quickly and the stock went up too much too soon – only for a case of serious buyers remorse to inevitably set in afterwards.
In addition, and partly perhaps for the same reason, several new products were introduced in 2012 all before they could make them fast enough or cheap enough, in what proved to be some very rocky experience-curve cost overruns. Apple had such huge cost issues in those months, especially including during the crucial Christmas holiday buying season, precisely from trying to bring significant, though certainly not yet “disruptive”, new products forward too quickly.
The shell of the new iPhone 5 was tricky to make without scratches at first, the Retina display of the new Macbook Pro was very difficult to manufacture with adequate yields and the absolutely gorgeous new iMacs were basically impossible to make at all, till they figured it out eventually losing sales in the mean time as well.
In corporate finance theory there is a much ignored element that asserts that over-valued shares are just as bad as under-valued ones, as it can’t be sustained and inevitably leads to disappointments. The only practicing CEO whom I have ever heard complain in public about the excessive value of his company’s stock, though, was the original founder of Sony Akio Morita, who once did just that during a period of frothy growth in Sony’s stock at the time many years ago. I think we should do it more often, as a corrective maybe when it is needed.
Positive Lessons For the Story
Apple, and Tim Cook, have certainly learned such lessons I believe, the hard way and will from now on, also, therefore likely only introduce whatever new products they may be dreaming up when they are sure they can manufacture them reliably and profitably as well from the get-go. Given their increasingly short life cycles this will indeed be essential. The Apple story will remain a polarizing story, as it always has been, and its shares will likely continue to be volatile because of it but in my own view, in some ways Apple is indeed just getting started – so call me a believer.
What is certain is that the epicentre of where the action is these days resides precisely at the intersection between hardware, software, services and inter-connectedness, and Apple is today right in the middle of it.
Carl Icahn has already made money just by announcing he has bought some shares. According to the press he is also calling for more share buy-backs by the company since, as he says, Apple can borrow cheaper than most companies and drive the shares up through the effect such financial engineering will have on earnings per share. That sounds like the active investor we know Icahn to be; it could be he will make a lot more money if he now just shuts up, and instead lets Apple get on with running the business.
Read More About Carl Ichan :
- Behind The Scenes Manoeuvres Continue As Carl Icahn Tries To Outlast Michael Dell
- To Vote or Not to Vote That is Certainly The Question for Dell Shareholders Unless the Company Postpones The Vote One More Time
- Requiem Or Prologue For Dell ? Shareholders Prepare To Vote
- Dell : The Dramatic Shareholders Meeting May Be Delayed For The Second Time
- Dell Deal Delayed
- It’s Getting Messy At Dell As Carl Icahn Takes The Battle Down To The Final Whistle
- Endgame Arrives For Dell’s Buy Out Bid: As Usual The Arbs Hold The Cards
- Endgame Arrives For Dell’s Buy Out Bid: As Usual The Arbs Hold The Cards
- Carl Icahn attacks the Dell takeover struggle, but from a different angle
- Carl Icahn Reportedly Building A $7 Billion War Chest To Finance His Dell Bid
- Carl Icahn attacks the Dell takeover struggle, but from a different angle
- Dell Deal With Michael Dell Goes Live Shareholders To Vote In July
- The Dell Deal Suddenly Looking Less Attractive
- Both Michael Dell And Fidelity Want To Know What Makes Rami Run?
- Situation At Dell Becomes More Interesting As The Blackstone Group Pull Out Of The Bidding
- Carl Icahn Cuts Dell Some Slack As He Agrees To An Investment Cap
- Carl Icahn Continues To Make Waves- But This Time Its Sound Waves
- Update: It Just Got More Crowded At Dell As Stephen Schwarzman’s Blackstone Joins Carl Icahn In A Bidding War.
- Icahn Set To Put A Spoke In The Wheel Of Michael Dell’s Dream Buyout
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