Pestering Apple about its cash hoard has become something of a sport for activist investors. A while back, David Einhorn, for instance, demanded that Apple return some of its massive cash hoard to shareholders in the form of preferred stock, or iPrefs, as he called them. Apple refused, instead opting for a combination of share repurchases and dividends. For the most part, that satisfied the activists… for a while. But now the biggest of them is back for more… much more.

On October 9, Carl Icahn, owner of 53 million shares of Apple Inc., sent an open and much-anticipated letter to Apple CEO Tim Cook. It was fairly long but well thought out and lacking any of the confrontation or criticism one might expect from an activist investor. To the contrary, Icahn was quite complimentary of Cook in his letter, telling him at one point that: “…we could not be more supportive of you and your team and the excellent work being done at Apple.”

However, Icahn did have a request—and a weighty one at that. For those of you who missed it, or more likely didn’t want to wade through the nine-page missive, here’s the gist of Icahn’s message to Cook:

  • The Street is seriously underestimating Apple’s growth prospects.
  • Therefore, shares are seriously undervalued. “We forecast… impressive earnings growth over the next few years,” said Icahn, “and therefore we believe Apple is dramatically undervalued in today’s market.”
  • While shares are a bargain, they should be repurchased: “…the more shares repurchased now, the more each remaining shareholder will benefit from that earnings growth,” the letter stated.

With regard to the first point, Icahn foresees revenue growth of 25% in fiscal year (September) 2015, and another 21% in 2016. He believes this revenue growth will, in turn, drive earnings growth in 2015 and 2016 of 44% and 30%, respectively.

Here’s how Icahn’s forecast stacks up against those of analysts who follow Apple:

  Forecasted Revenues (Billion) Forecasted EPS
  2015 2016 2015 2016
Consensus $202.3 $216.5 $7.29 $8.11
High $220.3 $250.0 $8.00 $9.30
Low $185.2 $192.8 $6.32 $6.20
Icahn $225.5 $272.9 $9.13 $11.87

As you can see, Icahn’s forecasts are considerably higher than even the rosiest of analysts’ estimates. He devotes much of his letter to explaining why he thinks such robust growth is likely. His primary thesis revolves around the smartphone segment, where he projects a whopping 30% growth in revenues in 2015, and another 7% in 2016.

Icahn believes that most of Apple’s 2015 smartphone growth will come from market share gains, primarily at the expense of Android phones. That belief has earned him a good deal of ridicule. For example, Peter Cohan, writing for Forbes says, “Sadly for Icahn’s argument, the iPhone is losing market share to Android. According to IDC… between the second quarter of 2011 and 2014, the iPhone share of the global smartphone market fell from 18.3% to 11.7% while Android’s share soared from 36.1% to 84.7%.”

Cohan’s dismissiveness is based on the mistaken notion (common among industry observers) that the smartphone market is homogeneous. It is not. Two-thirds of the approximately 1 billion smartphones sold last year were extremely low-end, mass-market devices that are effectively being used as basic camera phones. In a November 2013 article, Dan Dilger said these low-end devices are only called smartphones because the industry has decided that running Android makes a device “smart” even though many have such limited processing power and memory that they can’t really run apps and can’t be upgraded. While Android is dominant in this end of the market, Apple eschews it because it’s unprofitable.

In the premium (some would say the “true”) smartphone market, Apple has a share of about 50%. And with the iPhone 6’s early success (estimates are that 60 million will sell in calendar Q4), it looks as if the company will continue to gain share in the space.

All of this is to say that we, like Icahn, think Apple’s revenues and earnings, driven mainly by its iPhone segment, will grow at the high end of analysts’ estimates over the next few years, and Icahn’s 2015 forecast—though more optimistic than our own—is not completely outlandish.

Whereas Icahn sees 2015 earnings of $9.13, we think something like $8.00 is more likely. And whereas he believes the stock’s value, based upon his earnings estimate, is $203, we think a valuation of $130 is more reasonable. In either case, the stock, currently trading at about $98, is underpriced and therefore Icahn’s repurchase argument has merit.

Curiously, in his letter to Cook, Icahn did not specify the amount he would like to see Apple spend on share repurchases. However, in a subsequent television appearance, he said he’d like to see Apple launch a $100 billion tender offer. Too aggressive? Perhaps. But for those who think it might jeopardize the company’s ability to innovate, consider this: the company has $133 billion in net cash, generates about $50 billion annually in free cash flow, and spends about $6 billion annually on R&D. It doesn’t appear to us as though the R&D budget will be under the threat of austerity measures any time soon.

Icahn probably doesn’t expect Cook to accept his proposal without a little horse trading. But even if he’s only successful at getting the CEO to go halfway with a $50 billion buyback, that would lower the share count substantially.

Taking the side of an old “corporate raider” (now politely called an “activist”) may be controversial. But in this case, we think that most abused of species, the shareholder, is being well served by Icahn. In effect, he’s asking Apple’s management to stick to the thing they do best… innovating and producing lifestyle products… and get out of the fund management business. Pat Regnier of Money Magazine said it well when he observed that most of Apple’s $133 billion in cash is “not currently tied up in Apple’s business, but is sitting in a portfolio. The Icahn argument, essentially, is that no one needs Apple’s expertise as a de facto fund manager.”

So now, the ball is in Cook’s court.