Apple’s Stellar Earnings Will Make Its Recent Drop a Distant Memory

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Apple (NASDAQ:AAPL) posted stellar earnings on Jan. 27 for its fiscal Q1 ending Dec. 25, 2021. The bottom line is that it not only beat analysts’ expectations but also raised analysts’ expectations for the future. As a result, the drop in AAPL stock in the past month looks like it will be a distant memory.

Apple (AAPL) logo on building
Source: pio3 / Shutterstock.com

Apple’s total revenue reached $123.95 billion for the quarter, up 11% year-over-year. This included $71.6 billion in iPhone sales, which exceeded analysts’ expectations of just $67 billion in revenue, according to Seeking Alpha.

But the company seemed even more pleased with the fact that its services and wearables divisions had huge gains. For example, services moved up to $19.5 billion or 15.7% of total sales, up from 14.1% a year ago. In addition, wearables are now $14.7 billion or 11.9% of sales, up from 11.6% last year. These numbers can be seen on page 1 of its financial results PDF.

Huge Free Cash Flow and Capital Return to Shareholders

Even more importantly the company posted massive increases in its quarterly free cash flow (FCF). FCF is what companies use to pay for their dividends and share buybacks.

For example, on page 3 of the financial statements, Apple shows that its cash flow from operations (CFFO) was $46.966 billion. After deducting $2.803 billion in capex spending, that results in $44.163 billion in FCF for the quarter.

That is an amazing 35.6% of its total $123.945 billion in sales. In other words, well over one-third of every sales dollar goes straight into the company’s bank coffers free of any expenses, including operating and tax costs.

No wonder Apple decided to pay a fourth quarter dividend set at 22 cents per share. Given Apple’s history of raising dividends every fifth quarter and this huge cash flow, expect it to raise the dividend per share going forward. So far this quarter the dividend cost just $3.73 billion, well below the $44.16 billion in FCF.

Moreover, the company also bought back $20.478 billion worth of shares during the quarter. This also reduces the share count and lowers the dividend cost going forward, even if it raises it on a per-share basis.

Both of these items — the dividend and the buyback — cost just $24.2 billion. This is well below the $44.1 billion in FCF Apple generated during the quarter. So the company can clearly afford these items.

The remaining amount went to pay down debt, taxes and increase its cash balance.

Where This Leaves the Value of AAPL Stock

Analysts now forecast that revenue for the year ending Sept. 2022 will rise to $394.54 billion, up 7.9% from $365.8 billion last year. But if the 11% gain in Q1 keeps pace, they may end up raising their projections to match that rate of increase over the rest of the year.

Nevertheless, let’s assume that its full-year FCF will be 35.6% of the $394.5 billion in sales for the fiscal year. That will bring the total year FCF to $140.46 billion. We can use that to value AAPL stock.

For example, if we use a 3% FCF yield metric to value AAPL stock, the target market cap works out to $4.681 trillion. That is seen by dividing $140.46 billion by 3.0%.

This represents a potential 65.7% upside over Apple’s $2.825 trillion market value right now. In other words, AAPL stock is worth almost $300 ($287), based on a 65.7% gain over its price today of $173.21.

What to Do With Apple Stock

Apple’s stellar results should lead to investors considering investing more in AAPL stock. The reason is its huge FCF is surging and can lead to higher dividends, more buybacks and a much higher price. The latter is based on using a 3% FCF yield metric to value its projected $140 billion in FCF for this fiscal year.

Moreover, next year, analysts project even higher sales. It’s also comforting to know that the iPhone is not the only element driving sales, as its services and wearables divisions are slowly gaining higher portions of the total sales pie.

On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


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