Icahn Letter to Apple

CARLICAHNISSUESOPENLETTERTOTIMCOOKMay18,2015

byCarlIcahn

FORIMMEDIATERELEASE

Contact:

IcahnCapitalLP

SusanGordon

(212)7024309

CARLICAHNISSUESOPENLETTERTO

TIMCOOK,CHIEFEXECUTIVEOFFICEROFAPPLE

NewYork,NewYork,May18,2015TodayCarlIcahnreleasedtheattachedopenlettertoTim

Cook,theChiefExecutiveOfficerofAppleInc.

Formoreinformationonthisandothertopics,followCarlIcahnonTwitterat:

@Carl_C_Icahn

https://twitter.com/Carl_C_Icahn

ALLRECIPIENTSAREADVISEDTOREAD

IMPORTANTDISCLOSUREINFORMATION

ATTHEENDOFTHEATTACHEDLETTER

CarlC.Icahn

767FifthAvenue,47thFloor

NewYork,NewYork10153

May18,2015

DearTim:

WeagainapplaudyouandtherestofmanagementforApplesimpressiveoperational

performanceandgrowth.Itistrulyimpressivethat,despitesevereforeignexchangeheadwinds

andmassivegrowthininvestment(inbothR&DandSG&A),thecompanywillstillgrow

earningsby40%thisyear,accordingtoourforecast.AfterreflectinguponApplestremendous

success,wenowbelieveApplesharesareworth$240today.Appleispoisedtoenterandinour

viewdominatetwonewcategories(thetelevisionnextyearandtheautomobileby2020)witha

combinedaddressablemarketof$2.2trillion,aviewinvestorsdontappeartofactorintotheir

valuationatall.Webelievethismayleadtoadefactoshortsqueeze,asunderweightactively

managedmutualfundsandhedgefundscorrecttheirmisguidedpositions.Toarriveatthevalue

of$240pershare,weforecastFY2016EPSof$12.00(excludingnetinterestincome),applya

P/Emultipleof18x,andthenadd$24.44ofnetcashpershare.Consideringourforecastfor30%

EPSgrowthinFY2017andourbeliefApplewillsoonentertwonewmarkets(Televisionand

theAutomobile)withacombinedaddressablemarketsizeof$2.2trillion,wethinkamultipleof

18xisaveryconservativepremiumtothatoftheoverallmarket.Consideringthemassivescope

ofitsgrowthopportunitiesandtrackrecordofdominatingnewcategories,weactuallythink18x

willultimatelyprovetobetooconservative,especiallysinceweviewthemarketingeneralas

havingmuchlowergrowthprospects.

WearepleasedthatApplehasdirectionallyfollowedouradviceandrepurchased$80billionof

itsshares(yieldingthecompanysshareholdersanexcellentreturn),butthecompanys

enormousnetcashpositioncontinuestogrowwhilethecompanyssharesarestilldramatically

undervalued.WithApplessharestradingforjust$128.77pershareversusourvaluationof$240

pershare,nowisthetimeforamuchlargerbuyback.WeappreciatethattheBoardjust

increasedthesharerepurchaseauthorizationby$50billion,andthatitcontinuestoprioritize

sharerepurchasesoverdividends(asitshould).Weagainsimplyaskyoutohelpusconvincethe

boardofhowthesetwounderlyingissues(inefficientnetcashgrowthandshareundervaluation)

persistandcombinetoenhancetheopportunityforacceleratedsharerepurchasesingreater

magnitude.Wealsoaskyoutohelpusconvincetheboardthatthisisnotachoicebetween

investingingrowthandsharerepurchases.Asourmodelforecasts,despitemorethan30%

growthinR&DannuallythroughFY2017to$13.5billion(upfrom$1.8billioninFY2010)and

yourupdatedcapitalreturnprogram,Applesnetcashposition(currentlythelargestofany

companyinhistory)willcontinuetobuildonthebalancesheet.

Itisourbeliefthatlargeinstitutionalinvestors,WallStreetanalystsandthenewsmediaalike

continuetomisunderstandAppleandgenerallyfailtovalueApplesnetcashseparatelyfromits

business,failtoadjustearningstoreflectApplesrealcashtaxrate,failtorecognizethegrowth

prospectsofAppleenteringnewcategories,andfailtorecognizethatApplewillmaintain

pricingandmargins,despitesignificantevidencetothecontrary.Collectively,thesefailures

havecausedApplesearningsmultipletostayirrationallydiscounted,inourview.

WhenwecompareApplesP/EratiotothatoftheS&P500index,wefindthatthemarket

continuestovalueAppleatasignificantlydiscountedmultipleofonly10.9x,comparedto17.4x

fortheS&P500,awardingtheS&P500witha60%premiumvaluationtoApple:

Importantly,aswehavenotedpreviously,weassumea20%taxrateforthepurposeof

forecastingApplesrealcashearnings,notthe26.2%effectivetaxrateusedbyApple,and

viewthisasanecessaryadjustment,oftenoverlookedbybothanalystsandinvestors.Formore

detailonourmethodologyforthisadjustment,pleasereviewourlettertitledCarlIcahnIssues

LettertoTwitterFollowersRegardingApplepublishedFebruary11th,2015,whichyoucanfind

here:http://www.shareholderssquaretable.com/lettertotwitterfollowersregardingapple/

ByapplyingthisadjustmenttothecurrentconsensusFY2015EPSof$8.96(amongthe45

analystswhohaveupdatedtheirEPStargetssinceApril22nd),theadjustedresultis$9.71.

Notably,whilepreviouslycriticizedbysomeoftheseanalystsasbeingtooaggressive,this

consensusEPSforecast,whichincludesinterestincome,isnowlargelyinlinewithourown

forecastof$9.60,whichdoesnotincludeinterestincome.And,onceagain,weexcludeinterest

incomefromourEPSforecastbecausewevalueApplesenormousnetcashbalanceseparately

fromtheenterprise,unlikemostanalysts.

WhileourforecastforFY2016EPSissignificantlyaboveWallStreetconsensustoday,in

October2014sowasouroriginalforecastforFY2015EPS,whichisnowinlinewiththeWall

Streetconsensus.Weareoptimisticthatecosystemimprovements(AppleWatch,ApplePay,

HomekitandHealthkitinparticular)willdrivemodestgrowthiniPhonerevenuesnextyear,

despitethedifficultcomparisonthatwillresultfromiPhonestremendousperformancethisyear.

WithanewiPhoneexpectedinSeptember2016,ApplestandstobenefitasiPhonecontinuesto

takepremiummarketshare(switchersfromcompetitors),asthemiddleclasscontinuestogrow

inemergingmarkets,andasthemodestlevelofupgrades(only20%todate)indicatespulling

demandforwardfromFY2016toFY2015maynotbeassevereassomehavehighlighted.

AlongwithamoredramaticpushintotheTVmarket,increasingtractionwithAppleWatch,and

theintroductionofalargerscreeniPad,wehaveconfidenceinourforecastforFY2016.

WebelieveAppleWatch,ApplePay,Homekit,Healthkit,BeatsMusic,andfurtherinnovationin

existingproductlinescollectivelyrepresentatremendousopportunitythatontheirownjustifya

valuationthat,attheveryleast,reflectsamarketmultiple.Thatbeingsaid,weshareyour

excitementthatourbestdaysareaheadofusandthatApplehasnoshortageofgrowth

opportunitiestopursue.ThecompanysdramaticincreaseinR&Dspendingshouldsignalto

investorsthatAppleplanstoaggressivelypursuethesegrowthopportunities.Itmaybedifficult

forsometofathom(onlybecauseAppleisalreadythelargestcompanyintheworld),butApple

isverymuchalongtermgrowthstoryfromourperspective,whichisexactlywhywebelievethe

companyssharesshouldtradeatapremiummultipletotheS&P500,asopposedtotheS&P

500tradingata60%premiumtoApple.WhilewerespectandadmireApplespredilectionfor

secrecy,thecompanysaggressiveincreasesinR&Dspending(andsomeofthemore

wellsupportedrumors)havebolsteredourconfidencethatApplewillentertwonewproduct

categories:televisionandcars.Combined,thesetwonewmarketsrepresent$2.2trillion,three

timesthesizeofApplesexistingmarkets(ifweexcludeAppleWatch).

Excludingadvertising,theaddressablemarketfortelevisionisapproximately$575billion,

whichislargerthanthesmartphonemarket.Also,giventhatpeoplespendanaverageof12%of

thedaywatchingTV(equatingto25%oftheirfreetime),weviewtelevisionsroleintheliving

roomasastrategicallycompellingboltontotheAppleecosystem.InadditiontoanUltraHigh

Definitiontelevisionset,weexpectAppletolauncharelatedsuiteoftieredproductsand

services,includingaskinnybundleofpaytvchannels(partneredwithvariousmedia

companies)andanupdatedAppleTVmicroconsole(whichwillcontinuetoservicethemassive

installbaseoftelevisionsofferedbyotherOEMs).ThiswillenableAppletopursuetheentire

marketbyofferingmultipleproductsatvariouspricepointsacrossthedemographicspectrum.

Netflixoffersasimilartieredapproachtopricingtodaybychargingahigherpriceforthose

seekingtheabilitytoreceiveultrahighdefinitioncontent.

WebelievethismoveintoTVwillalsobenefitalltheotherdevicesandservicesintheApple

ecosystem.Asjustoneofmanypossibleexamplesofthis,theAppleWatchcouldperhapsbe

usedasaremotecontrol.Similarly,asweexpectAppletolaunchalarger12.9iPad,itwould

offeranenhancedviewingexperienceforanApplepaytvservice,oractanimprovedsecond

screentoanAppleUltraHDtelevision.

At$1.6trillion,theenormousaddressablemarketfornewcarsisapproximatelyfourtimesthe

sizeofthesmartphonemarket.Itsestimatedthatpeoplespendanaverageof1houreveryday

traveling,mostlyincars,butnoteveryonedrives,implyingthattheaveragetimethatdaily

commutersspendinacarismuchhigher.WebelievetherumorsthatApplewillintroducean

Applebrandedcarby2020,andwebelieveitisnocoincidencethatmanybelievevisibilityon

autonomousdrivingwillgainmaterialtractionbythen.

Asautonomousdrivingwouldreleasedriversattentionfromtheactivityofdrivingand

navigating,andperhapsevenincreasethetimepeopleactuallywanttospendinsideacar,both

anautomobileandtheservicesprovidedthereinbecomeevenmorestrategicallycompelling.

WhileApplecurrentlyaddressesthismarketwithCarPlay,itseemslogicalthatApplewould

viewthecaritselfasatheultimatemobiledevicetowhichitcouldbringitspeerlesstrackrecord

ofmarryingsuperiorindustrialdesignwithsoftwareandservices,alongwithitsglobally

admiredbrand,andofferconsumersanoverallautomobileexperiencethatnotonlychangesthe

worldbutalsoaddsarobustverticaltotheAppleecosystem.AndforApple,thecarmarketis

morethanbigenoughtomovetheneedlesignificantly,evenastheworldslargestcompany.

Therisingcostofoil,itsimpactonglobalwarming,thegeopoliticalrisksassociatedwithoil

dependency(especiallyasfuelforautomobiles),followedmorerecentlybytheriseofcost

effectivealternativespresentsachangetheworldopportunityforApple.Itiswidelybelieved

thattheelectricbatterywillplayakeyroleinthistransition.Thelithiumionbatteryalready

representsacriticalcomponentacrossmanyofApplesexistingproducts(iPhone,iPad,Apple

Watch,MacBook,Beats)andanyfurtherinnovationcouldbeagamechangerintermsofboth

batterylifeandformfactoracrossApplesentireecosystem.Sincelithiumionbatteries

representalargepercentageofthecostoftodayselectricvehicle,webelieveAppleshouldbe

wellpositionedtoleverageitsexistingknowledgedomainandmorerobustR&Dspendingin

thisarea,andinturnapplyanyenergydensity/batterylifeimprovementsforacaracrossallthe

otherproductsinitsecosystemthatwillsharethebenefitfromsuchbatteryinnovation(iPhone,

iPad,AppleWatch,MacBook,Beats).

Asamobiledevicethatisdifferentiatedbydesign,brand,andconsumerexperiencewhere

softwareandservicesareincreasinglycritical,anApplecarwouldseemtobeuniquely

positioned.

Whilethetelevisionandthecaroffertremendousgrowthopportunities,Applescoreecosystem

continuestoimproveandgrow,nowsometimesreferredtoasamegaecosystem,atermwe

findincreasinglyappropriate,aswelookatthebreadthofitscomponents,whichnowinclude

existingproducts(iPhone,AppleWatch,Mac,iPad,Beats,AppleTV),software/services(Apple

Pay,Homekit,Healthkit,Carplay,iCloud,iTunes,andrumoredBeatsMusic,payTVservice),as

wellaspossiblenewproductsinnewcategories(aCar,aTVset).Furthermore,ongoing

innovationsandenhancementstoalloftheabovewilldriveevenmorepremiummarketshare

gainsforiPhone,whichsitsattheepicenterofthismegaecosystem.

Applehasclearlydemonstratedatrackrecordofexcellenceandsuccesswhenenteringnew

categories.WeexpectthistocontinuewiththeAppleWatch,thetelevision,andthecar,andthe

worldwilllookbackontodaysundervaluationasafascinatingexampleofmarketinefficiency

(andlikewiseonourvaluationat18xearningspershareasconservative).Becauseofthis,we

encouragebothacceleratedandlargermagnitudesharerepurchasesasyouconsiderhowto

allocatecapitalgoingforward.Asyoucontinuetoevaluatethisopportunity,andconsiderthe

rightpricesatwhichtoopportunisticallyrepurchaseshares,wehopeyougivecredencetoour

adviceinlightofourinvestmentrecord.Unlikethemanyactivelymanagedmutualfundsand

hedgefundsthatareunderweightAppleandhaveunderperformedtheS&P500,wehave

exhibitedstrongoutperformance,thanksinparttoourlargepositioninApple.TheSargon

Portfolio(adesignatedportfolioofassetscomanagedbyBrettIcahnandDavidSchechter

withintheprivateinvestmentfundscomprisingIcahnEnterprisesInvestmentsegmentandHigh

RiverLimitedPartnership,subjecttothesupervisionandcontrolofCarlIcahn)hasgenerated

annualizedgrossreturnsof36.9%sinceitsformationonApril1,2010throughApril30,2015

with$8billionofassetsundermanagementasofApril30,2015.

Ifyouchoosenottopursuesomeofthenewcategorieswehighlighted,oryoufindourgrowth

forecaststooaggressiveforanyonenewcategoryinparticular,wellbethefirsttoadmitthat

youaremoreknowledgeableintheseareasthanweare.Butwebelieve,thatunderany

circumstances,youwouldagreethatintheaggregate,allthesenewcategoriestakentogether

(alongwiththoseofwhichwemaybeunaware)representoneofthegreatestgrowthstoriesin

corporatehistory,aswellasoneofthegreatestopportunitieseverforacompanytoinvestin

itselfbyrepurchasingitsshares.

Sincerely,

CarlC.Icahn

BrettIcahn

DavidSchechter

KeyAssumptions

iPhoneafterourestimateof43%revenuegrowthinFY2015,weforecastmodestrevenuegrowthinFY2016ofjust2.3%,followedbymoderaterevenuegrowthof6.7%inFY2017,alldrivenbyvolumegrowthamidstflataveragesellingpricesoverthethreeyearperiodpacedbyswitchers,newmiddleclassusers,ecosystemstrength,andinnovation

iPadafterdisappointingrevenuegrowthofnegative21.5%inFY2015ascannibalizationfromthelargerscreeniPhoneandcustomersutilizingexistingoldermodelsforlongerthanweexpectedimpactedresults,weforecastAppleisataninflectionpointandexpecttheintroductionofanewlargerscreeniPadinconjunctionwithitspushintotelevision,penetrationintotheenterprise,maturationofthereplacementcycle,newmiddleclassusers,ecosystemstrength,andinnovationtodrivestrongperformancewithrevenuegrowthof27.7%inFY2016and14.2%inFY2017.

MacinadecliningPCindustry,weexpectMactocontinueitsmarketsharegainandsupportourforecastforitsstrongperformanceof7.3%revenuegrowthinFY2015,followedby3.6%inFY2016,and4.6%inFY2017onflataveragesellingpricesoverthethreeyearperiodof$1,230.

AppleWatchaftertherecentreleaseinthe2ndhalfofFY2015,weexpecttheAppleWatchtogaintractionandbeasuccessinthemarketleadingourforecastsof10millionunitsduringthe2ndhalfofFY2015at$600averagesellingpricesincludingtheextra

bandsmanyconsumerswillorder.ThroughoutFY2016weexpecttheAppleWatchtogainfurthertractionandasecondgenerationAppleWatchtobereleasedsometimein2ndhalfofFY2016.WeexpectimprovementsinboththenumberandqualityofAppsalongwithaddingsensorsandfunctionalityinlatergenerationsoftheAppleWatchtoevolvetheAppleWatchintoamusthaveaccessoryovertimeforiPhoneowners.Weforecastrevenuesof$6billioninFY2015,$22.5billioninFY2016,and$45billioninFY2017.

AppleTelevisionSetaftermanyyearsofrumorsaspartofApplespushintotelevisionandaswereferencedpreviously,weexpectinFY2016Applewillsell55and65ultrahighdefinitiontelevisionsets.Weforecastrevenuesof$15billioninFY2016and$37.5billioninFY2017on10millionand25millionunitsrespectivelywithaveragesellingpricesof$1,500.

iTunes,Software,&ServicesaspartofApplesmoveintotelevision,weexpecttheintroductionofaskinnybundleofpaytvchannels(partneredwithvariousmediacompanies)andvideocontentsoldthroughiTunes,alongwithaBeatsMusicsubscriptionserviceandAppStoresalesgiveuscomfortinourforecastsofgrowthoverthenextthreeyearsof6%inFY2015,10%inFY2016,and15%inFY2017.NottomentionHomeKitandHealthKitwhichfornowweexpecttonotbemonetizedbutsimplyenhancetheoverallecosystem.

AccessoriesandiPodaspartofApplesmoveintotelevision,weexpecttheintroductionofanupdatedAppleTVmicroconsole(whichwillcontinuetoservicethemassiveinstallbaseoftelevisionsofferedbyotherOEMs),alongwithimprovementstoBeatsheadphonestodrivegrowthfarinexcessofthedeclineiniPodwhichatourforecast$1.1billionofrevenuesinFY2015islargelyirrelevanttoApplefinancially

ApplePayafteraninsignificantfinancialcontributioninFY2015weexpectApplePaytogainacceptanceatmoreretailersandforAppletoexpandtheserviceinternationally.Ourforecastsforrevenues(alsoequivalenttogrossmarginsasthevariablecostsaredeminimis)are$263millioninFY2015,$1.2billioninFY2016,and$3.3billioninFY2017.

GrossMarginsweforecastflatgrossmarginsof40.0%fromFY2015throughFY2017.

ResearchandDevelopmentR&DweforecastrobustgrowthinR&DasApplerampsitsinvestmentsininnovationatabreathtakingpacewithgrowthof32.4%,30%,and30%overthenextthreeyearsto$13.5billioninFY2017(upfrom$1.8billionspentinFY2010).

Selling,General,&AdministrativeSG&AweforecastheavyinvestmentinSG&A,asitrisesby19%,13.5%,and10%overthenextthreefiscalyearsto$17.8billioninFY2017.

InterestIncomewithregardstointerestincome,sincewevaluethenetcashseparatelyfromthebusiness,weassumenointerestincomefromApplesnetcashof$149.7billiononMarch28,2015.

EffectiveTaxRateimportantlyforthecompanysincometaxrate,weconsider20%amoreappropriatetaxrateforthepurposesofforecastingrealearnings,notthe26%effectivetaxrateAppleusesintheirincomestatement.MostcompaniesintheS&P500statethattheyplantopermanentlyreinvesttheirinternationalearningsandthereforedonothavetoaccrueforanincometaxonunremittedearningsandthusshowalowertaxrate.Googleisagoodexampleofthis,asitseffectivetaxrateis20%.Apple,unlikeGoogleandmostcompaniesintheS&P500haschosentoaccrueincometaxesonsomeofitsunremittedinternationalearningsandaccordinghasaneffectivetaxrateof26%.Therefore,whenassessingthemultipleofearningsatwhichAppleshouldtrade,webelieveitisappropriatetousea20%taxrateforAppleinordertomakesuchcomparisonsApplestoApples,nopunintended.

ShareRepurchasesweassumesharerepurchasesof$37.5billion,$31.25billion,and$37.5billionoverthenextthreeyearforourforecastandnotthemoreaggressivepacewehopetheBoardwillundertake

CashFlowforsimplicitypurposes,weassumenetincomeequalscashflowotherthandividendsandsharerepurchases

Valuationwithregardstovaluationofthecompanyat$240pershare,thisincludesvaluingthebusinessat$216pershare(at18xourFY2016earningsestimateof$12pershare)plusnetcashpershareof$24($150billionofnetcashlessthetaxeffectoninternationalcashforrepatriation,whichweestimatetoultimatelybe6%,andforsimplicitypurposes,applytoallcashonbalancesheetratherthanjusttheinternationalcash).

ImportantDisclosureInformation

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EXPRESSESOURCURRENTVIEWSONAPPLE.ITALSODISCLOSESOURCURRENT

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THEIROWNDECISIONSREGARDINGAPPLEANDITSPROSPECTSWITHOUT

RELYINGON,OREVENCONSIDERING,ANYOFTHEINFORMATIONCONTAINEDIN

THISLETTER.

FORWARDLOOKINGSTATEMENTS

Certainstatementscontainedinthisletterareforwardlookingstatementsincluding,butnot

limitedto,statementsthatarepredicationsoforindicatefutureevents,trends,plansor

objectives.Unduerelianceshouldnotbeplacedonsuchstatementsbecause,bytheirnature,they

aresubjecttoknownandunknownrisksanduncertainties.Forwardlookingstatementsarenot

guaranteesoffutureperformanceoractivitiesandaresubjecttomanyrisksanduncertainties.

Duetosuchrisksanduncertainties,actualeventsorresultsoractualperformancemaydiffer

materiallyfromthosereflectedorcontemplatedinsuchforwardlookingstatements.

Forwardlookingstatementscanbeidentifiedbytheuseofthefuturetenseorother

forwardlookingwordssuchasbelieve,expect,anticipate,intend,plan,estimate,

should,may,will,objective,projection,forecast,managementbelieves,

continue,strategy,positionorthenegativeofthosetermsorothervariationsofthemorby

comparableterminology.

Importantfactorsthatcouldcauseactualresultstodiffermateriallyfromtheexpectationsset

forthinthisletterinclude,amongotherthings,thefactorsidentifiedunderthesectionentitled

RiskFactorsinApplesAnnualReportonForm10KfortheyearendedSeptember27,2014.

Suchforwardlookingstatementsshouldthereforebeconstruedinlightofsuchfactors,and

Icahnisundernoobligation,andexpresslydisclaimsanyintentionorobligation,toupdateor

reviseanyforwardlookingstatements,whetherasaresultofnewinformation,futureeventsor

otherwise,exceptasrequiredbylaw.