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Apple Inc (AAPL) stock has risen substantially since releasing its fiscal Q2 earnings on May 2. But it could still be worth almost 25% more over the next year based on its strong free cash flow and FCF margins.
In morning trading on June 4, AAPL is at $194.19, up 14.7% from May 1 when it was at $169.30 per share. In my last Barchart article on May 3, “Apple Stock Surges on Buyback and Dividend News - OTM Options are Cheap Here, " I discussed the company's free cash flow and upside potential.”
In that article, I showed that AAPL stock could be worth as much as $217.44 per share. That still provides a +12% upside over today's price.
But since then analysts have raised their revenue projections, especially for next year. As a result, I can project that AAPL stock could be worth as much as $265.32 over the next year. That is almost 37% higher than today. I will show how I derive this target price below. Note that the average of these two target prices is $241.38, or 24.3% higher than today.
Projecting Apple's FCF
In the last six months, as I pointed out in my prior article, Apple made $58.2 billion in free cash flow (FCF) on $210.328 billion in sales. That works out to an FCF margin of 27.7% in the past six months.
Moreover, as I pointed out in my recent May 23 GuruFocus article on Apple, the company generated $103 billion in FCF in the trailing 12 months (TT) ending March 2024. That represented a similar 27.2% of sales ($381.6 billion), close to the 27.7% 6-month margin.
We can use this FCF margin to estimate its future cash flow. For example, analysts now project that sales will hit $410.7 billion for the year ending Sept. 2024. That is projected to be 6.2% higher than this fiscal year ($386.88 billion).
Projecting a Target Price
So, if we multiply the $410.7 billion in 2025 projected sales by the 27.7% FCF margin it made recently, FCF could rise to $113.8 billion. That is 10.5% over the TTM FCF of $103 billion.
As a result, AAPL stock could be worth as much as $4.06 trillion using a 2.8% FCF yield metric. That is the same as multiplying FCF by about 36x. This market cap is 36.6% over today's market cap of $2.975 trillion. In other words, the stock could be worth 37% more at $265.32 per share.
Why did I use a 2.8% FCF yield metric? For one the company is buying back at least 2.5% of its shares annually. I showed how the share count has been falling about this amount every year in my GuruFocus article mentioned above. So, the buyback yield is about 2.5% for shareholders.
Moreover AAPL stock also has a 0.5% dividend yield. Altogether this works out to a 2.8% to 3.0% shareholder yield for investors. That is how the market is willing to value the stock.
Analysts surveyed by AnaChart.com also have a higher price target. The average of 32 analysts' price targets is $206.35. That represents a potential upside of at least 6% over today's price.
The bottom line is that AAPL stock still looks cheap here based on its powerful FCF. The average potential upside is almost 25% ($241.38 per share) from here, based on analysts' revenue estimates and its strong FCF margins.
However, keep in mind that this could take up to a year to occur. It won't necessarily happen overnight. Analysts' revenue estimates for next year have to come into focus by the market as achievable. If that occurs, AAPL stock still has a good upside for long-term investors, based on its strong FCF margins.
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. For more information please view the Barchart Disclosure Policy here.
