It’s happened again: The stock of the most beloved company in the world, Apple (AAPL), has dropped more than a third off its highs. Of course this means that no one likes it anymore.
Well, wake up, people! If you really think that Apple’s going to take over the world, this is the time to love the stock, not when it claws its way back toward $200 again.
Will Apple be affected by the global economic slowdown? Almost certainly. Are Apple’s margin guidance (and current revenue estimates) for the coming year concerns? Absolutely. Could Apple’s stock really fall out of bed if we go into another Great Depression–dropping to, say, $50 a share? Of course. But so could any stock. (These are stocks, not Treasury bonds–if you can’t stand the heat, get out of the kitchen).
But all that aside, Apple’s stock just isn’t that expensive anymore. At $127, the stock is trading at about 25X trailing earnings (that’s trailing, not analysts’ hallucinations about what is going to happen over the next few years).
Even better, thanks to the extraordinary cash-flow characteristics of the booming iPhone (get cash now, recognise revenue over 24 months), Apple’s valuation on an enterprise value to free cash flow basis is even more attractive: 15X.
What the heck is “enterprise value to free cash flow”?
That’s the value of Apple’s actual business ($91 billion) relative to the free cash flow the company has generated over the past year ($6 billion). For a company with Apple’s future promise, market position, and growth rate, 15X just isn’t that expensive.
Does it mean there’s no downside to Apple’s stock? Again, of course not: Apple’s cash flow could get smashed by a recession, a stock market crash could compress the multiple to 7-10 times, etc. There’s always downside. But at 15X, there’s a lot less downside than there was a few months ago, when Apple was trading at $190 a share and everyone loved it.
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