Apple Wows Investors With Solid Earnings Making AAPL Stock Look Cheap

Apple (AAPL) reported yesterday that it produced solid fiscal Q4 earnings for the quarter ending Sept. 24. As it stands AAPL stock is cheap at just 21x forward earnings, with a 23% free cash flow (FCF) margin and a 4.6% FCF yield. 

As a result, investors are pushing Apple stock higher given how powerful its results were and how strong its FCF was during the quarter. For example, it produced $24.1 billion in operating cash flow for the quarter and after capex spending, FCF was $20.8 billion. That represents 23% of its total $90.1 billion in revenue for the quarter.

Free Cash Flow

For the past fiscal year ending Sept. 24, Apple’s operating cash flow was $122.5 billion and FCF was $111.4 billion. That can be seen on page 3 of the company’s financial results in the cash flow statement. That FCF represents 28.3% of its $394.3 billion in full-year revenue.

Apple Cash Flow Statement Fiscal Q4

That also means that the $111.4 billion in FCF represents 4.6% of its $2,400 billion market capitalization. That is very cheap indeed.

Photo by zhang kaiyv 

Forecasts Make AAPL Stock Look Cheap

As revenue rose 8% during the quarter and FCF was strong, analysts are very positive on fundamentals going forward. For example, the average analyst revenue forecast for FY 2023 is for $428.9 billion, or 8.6% higher.

That means that assuming a 28% margin, FCF could hit $120 billion. Even if the margin falls to 25%, assuming a recession, FCF would still be well over $100 billion at $107 billion. 

Moreover, analysts forecast $6.76 in earnings per share (EPS), up from $6.11 EPS for the FY ending Sept. 24. That puts AAPL stock, at $153.76 today (Oct. 28), at just 22.7x earnings.

Where This Leaves Investors in Apple Stock

So far this year, AAPL stock is still down almost 15% YTD. Assuming the stock moves higher with these results, there is a good chance it could end the year with a positive return.

Here is one reason why. Typically, companies with this high FCF margin will have at least a 3% to 4% FCF yield. Today’s its FCF yield is 4.6% based on historical results (see above).

So, for example, if we estimate next year’s FCF hits $107 billion and then divide that result by 3.5%, the market cap should be $3.057 trillion. That is 27.4% higher than today’s market cap. 

This means that AAPL stock could be worth close to $200 (i.e., 1.234 x $153.76 = $195.81 per share). That will put the stock in positive territory for the year. 

As a result, investors are looking at AAPL stock as a bargain investment now.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.

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