Activist investor Carl Icahn suggests that Apple should launch an UltraHD TV set in 2016 in an open letter to CEO Tim Cook. Icahn posits numerous ways Apple CEO and the board can ensure the company provide good returns to investors. And according Icahn, a ultra-high-definition television (UltraHD TV) with superior picture quality would be the way to go. He predicts that Apple will sell “12 million 55” and 65” TV sets in FY 2016 and 25 million in FY 2017 at an average selling price of $1,500 at gross margins consistent with the overall company.”
Carl Icahn:
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While Apple has not announced plans for a TV set and may never do so, we believe we have good enough reason to expect the introduction of an UltraHD TV set in FY 2016. We think television represents a large opportunity for Apple, one that reaches far beyond “the hobby” that Apple TV currently represents. You recently stated, “TV is an area of great interest for Apple” and we agree that it should be. As we highlighted in our previous letter, we believe UltraHD’s (ultra-high-definition television) superior picture quality in comparison to regular HD will drive a major TV replacement cycle as the price gap between them narrows. It should also be noted that Reed Hastings, CEO of Netflix, has referenced UltraHD as a major catalyst for Netflix going forward, and while this is true for Netflix, we believe it is also true for Apple. Against the backdrop of this replacement cycle, FY 2016 represents an opportune time to introduce an UltraHD TV set. Therefore, included in our forecasts, we expect Apple to sell 12 million 55” and 65” TV sets in FY 2016 and 25 million in FY 2017 at an average selling price of $1,500 at gross margins consistent with the overall company. While we think adding a TV set to the Apple ecosystem would be meaningful from a financial perspective, we understand that you may choose not to do so, as you have wisely stated that “the toughest choices for Apple are what not to work on.” But, even if Apple chooses not to offer a TV set, our earnings estimates would 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.”
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