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Apple Inc. (AAPL), Microsoft Corporation (MSFT): In The End, Icahn Is Right

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Noted investor Carl Icahn is no stranger to controversy. Investors likely remember his recent battle with fellow hedge fund manager, Bill Ackman, over nutritional supplement maker, Herbalife Ltd. (NYSE:HLF). Ackman took the short side of the bet several months ago and paid dearly for it. Icahn was right about Herbalife (at least for the time being), and now he’s moved on to another company– technology juggernaut, Apple Inc. (NASDAQ:AAPL).

Apple Inc. (NASDAQ:AAPL)’s widely hyped iPhone announcement fell flat, and shares dropped 5% the same day. Icahn quickly stepped in, giving an interview on CNBC in which he disclosed he had purchased more shares of Apple, adding to his already sizable position. Is Icahn right about the house that Steve Jobs built?

Carl Icahn - Icahn Capital Lp

A supposed “no-brainer” investment
That’s how Icahn described Apple Inc. (NASDAQ:AAPL) at its current valuation, and it’s extremely difficult to find fault with his argument. Icahn referred to the stock as very cheap, and indeed, Apple does appear to be one of the most cheaply valued stocks. Even among technology stocks, Apple looks like a bargain.

The S&P 500 trades for a trailing P/E multiple in the high teens, and even stodgy fellow tech giant, Microsoft Corporation (NASDAQ:MSFT) trades for 12 times its adjusted fiscal 2013 earnings per share. Apple Inc. (NASDAQ:AAPL) exchanges hands for just 11 times trailing earnings. This is despite the fact that, while Microsoft posted 5.5% revenue growth in its most recent fiscal year, Apple generated 11% revenue growth through the first nine months of its current fiscal year. Also, consider that Microsoft has a much more heightened risk profile due to its continued tethering to the personal computer.

More catalysts than meet the eye
Apple Inc. (NASDAQ:AAPL)’s business collapsing is simply unrealistic, and the market is also completely glossing over the potential partnership with China Mobile Ltd. (ADR) (NYSE:CHL) , the largest telecommunications carrier in the world. China Mobile serves 700 million subscribers, and to this point, has not made the iPhone or any other Apple products available to its customers. A partnership with China Mobile could be a very lucrative opportunity for Apple, but clearly the market is unwilling to give it any credence whatsoever.

Plus, investors were wrong to hype up Apple Inc. (NASDAQ:AAPL)’s recent iPhone announcement in the first place. These aren’t the new products the market was hoping for, nor were they supposed to be. The iPhone 5S will indeed have a few interesting new features, such as a fingerprint scanner and an 8-megapixel camera. The iPhone 5C is a cheaper model of the iPhone 5. Quite simply, these models are the preface to market penetration in new geographies like China, India, and South Asia, where Apple can secure millions of new customers in its ecosystem.

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