Apple (AAPL) is nearing the low it hit for a few minutes in early October: the mid-$80s. We’re going to say again now the same thing we said then: At this level, Apple is CHEAP.
Excluding the value of its cash, Apple is trading at about 13X trailing EPS. That’s cheap for a company with this growth potential. But look at the stock relative to free cash flow instead of earnings (which is appropriate because of the deferred revenue accounting for iPhone sales), and it’s really cheap.
Apple generated $8.5 billion of free cash flow in fiscal 2008 (through September). Apple’s enterprise value at $88 a share is about $56 billion. That’s 7X trailing free cash flow.
Did you think you’d ever be able to buy Apple for 7X free cash flow? We certainly didn’t.
Could Apple get even cheaper? Of course. Stocks can always get cheaper. But at 7X free cash flow, Apple’s stock should have significant valuation support.
At this level, the market is assuming that Apple will be hammered in 2009–an assumption that is not yet reflected in analysts estimates. Over the next few months, as analysts realise that Apple will, in fact, be hurt by the economy, their estimates will likely come down, and the stock will have a hard time sustaining a rally until they do.
However: Unless Apple’s business collapses and the long-term story changes, we have a hard time believing Apple will trade at 7X free cash flow forever. So we say again: At $88, Apple is cheap, cheap, cheap.
See Also: Apple Stock Falls Under $90
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