Big Tech is looking pretty good right now, sporting nice gains after the market meltdown from a few weeks ago. But the real big bargain in the bunch for buying is Apple.
Jacob Sonenshine for Barron’s:
Investors bought the meltdown since there’s plenty of profit growth to come. The catch is that not all these stocks are good buys, considering their prospects for free cash flow…
[T]he companies are aggressively increasing their capital expenditures, or investments in long-term assets, both this year and next. They’re pouring money into data centers, which includes buying massive amounts of chips, as they build out their AI capabilities.
That pressures free cash flow…Enter, Apple. On the surface, it isn’t cheaper than many other Big Techs. Its price/earnings multiple of 31 times is close to Microsoft’s and Amazon’s, and it’s above the P/E ratios for all other companies mentioned above.
But… Apple doesn’t have to invest as much to weave AI into its products because it already has certain key assets in place. It has its own capex needs, and that expenditure should grow moderately…
If revenue grows at the 5.7% annual pace for the next several years that analysts project—and assuming management doesn’t have any particular reason to grow capex much faster than that—free cash flow can hit roughly $140 billion by 2027.
As Apple buys back more shares, which reduces its share count, free cash flow per share would well exceed $9.20 by 2027. The current share price of $226 is well below 25 times that type of 2027 free cash flow assumption.
MacDailyNews Take: What we’ve been saying for literally decades remains true today: Apple shares remain woefully undervalued.
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