Apple (AAPL) is getting interesting again.
Sources are reporting that new iPhones will be introduced next month. Fading rival BlackBerry (BBRY) is trying to lure in a suitor. And despite pouring billions into promoting Windows Phone 8 as a viable smartphone platform, Microsoft (MSFT) is pulling less than 4 percent in market share according to industry tracker IDC.
It's against this backdrop of calamity and opportunity that billionaire investor Carl Icahn is starting to shake things up. "We currently have a large position in APPLE," Icahn tweeted on Tuesday. "We believe the company to be extremely undervalued."
Icahn then went on to explain that he spoke to CEO Tim Cook, urging him to consider a more aggressive share buyback plan for the meandering tech giant than the one currently in place. Icahn's chatter was enough to send the stock higher on Tuesday. The stock tacked on $17 billion in value after Icahn's post, making it one of the most lucrative tweets in Twitter history. On Wednesday, the run-up continued, as Apple shares topped $503 early in the afternoon.
So, is Icahn right? Is Apple "extremely undervalued"? That all depends on which way you're looking.
There Are Many Ways to Slice an Apple
Apple is trading at a reasonable 12 times trailing earnings, cheaper than many of its consumer tech peers. Back out Apple's ample cash hoard -- $146.6 billion when you include marketable securities -- and Apple's multiple falls into the single digits.
However, Apple has lost some of its shine.
Revenue growth has been slowing as Apple surrenders market share in tablets and smartphones to Android devices.
After several years of profitability growth, the trend line has started to go the wrong way. Apple is coming off of back-to-back quarters of declining earnings as margins are getting squeezed, and analysts see the same scenario playing out through at least the next two quarters. Those same pros see flat revenue growth during the next two quarters -- and that's even with Cook's promise of new products coming out this fall ahead of the critical holiday shopping season.
Wall Street analysts foresee earnings falling 11 percent to $39.10 a share in the fiscal year that ends next month. They predict a bounce in fiscal 2014 -- up 8 percent to $42.31 -- but that's still well short of the $44.15 a share it earned in fiscal 2012.
Apple at 12 times trailing earnings isn't a bad deal. But if the pros are right it would also be trading at 12 times trailing earnings by the end of next year if the stock simply marched in place.
Apple may be cheap by most measuring sticks, but it won't seem like much of a bargain if Google's (GOOG) Android continues to gobble up the more of the market for smartphones, tablets, and now even laptops with its aggressively priced Chromebook line.
Rolling In Cash
Apple is putting its money where its mouth is. It returned $18.8 billion in cash to shareholders through its generous dividend and buybacks this past quarter, even though it only generated $7.8 billion in cash flow from operations during the period.
Some -- like Icahn -- feel that Apple can still dig a little deeper.
If Apple doesn't want to touch its ample cash reserves -- understandable, since most of that money was earned overseas and would require paying a hefty repatriation tax to bring back home -- the class act of Cupertino could borrow money that it would return to shareholders.
If Apple borrowed at 3 percent, then turned around and used that money to snap up more stock, Icahn believes that the share price could get to $625 without any earnings growth.
He's not the only one that has suggested that Apple leverage its stash to take advantage of low interest rates that won't be around forever. Fellow hedge fund billionaire David Einhorn made the same argument earlier this year.
The rub in the argument is that even flat earnings growth may be optimistic at this point. The proliferation of cheap Android products is leading consumers to buy cheaper iPhones, including resales, which leave Apple out in the cold. PC sales have been slumping, taking Macs down with them, and iPod sales have been sliding for a couple of years as portable media players get replaced by smartphones and tablets.
Apple's margins will likely continue to contract, regardless of what Apple introduces next month.
In the end, Apple is worth what the market believes that it's worth right now. Icahn may believe that Apple is cheap at this point, but a lot of investors also felt that way when they were buying in at higher prices when the stock was rallying last year.
Apple has innovated its way out of these slumps before, but it will be that much harder to sway consumers now that Jobs isn't around the way he was in pitching the iPod in 2001, the iPhone in 2007, and the iPad in 2010.
Apple needs something new before it become old, borrowed, and blue.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft.
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