APPLE: Detailed Fundamental Analysis - Long view

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With a market capitalization of $2.8 trillion, some investors may have a hard time realizing that Apple stock could be a good buy today. But investors may change their minds after scrutinizing the company's underlying cash flow relative to this valuation, as well as Apple's growth opportunities.

While investors will want to do their own due diligence before buying the stock, here are some eye-opening points about the company that will make it easier for you to get started.

Incredible cash flow
Apple's free cash flow, which is the cold, hard cash left over after all regular business operations and capital expenditures, was about $108 billion in 12 months. That implies that the stock trades at a ratio of 28 to free cash flow-a reasonable, if not an attractive valuation for a company with a diverse product mix, a loyal customer base, and a long history of disciplined and value-creating capital allocation decisions by management.

Apple's substantial cash flow gives it ample opportunity to choose how it creates shareholder value. While some cash from operations is reinvested back into the business through capital expenditures, the remaining free cash flow allows the iPhone maker to either pay dividends, repurchase stock or do both. Apple , of course, has done both for years. Over the past 12 months, the company has spent $91 billion on stock buybacks and paid out $15 billion in dividends over the same period.

Despite Apple's aggressive program to return capital to shareholders, the company still has $179 billion in cash and marketable securities. Moreover, even if you subtract the company's debt from its cash position, its net cash position is still $60 billion.

High demand
Apple's strong earnings performance at a time of global macroeconomic uncertainty is also impressive. The tech company's fiscal Q3 earnings rose 2 percent YoY -- and that's on top of a 36 percent increase in the year-ago quarter.

That growth, however, still underestimates the demand for Apple products. In fiscal Q3, sales were limited to production. "Macs and iPads were so limited in supply that we didn't have enough production to meet demand," Apple CEO Tim Cook said during the company's fiscal Q3 earnings call. Cook even said that iPhones, the company's largest segment, saw no signs of weakening demand because of macroeconomic factors.

Significant growth potential
The last point is perhaps the most important. There is one area in which the company seems to have room to strive: monetizing its installed base of active devices. Apple executives see its installed base as a key growth lever for the company going forward. " is the engine of our company, and it continues to grow," Apple CFO Luca Maestri explained during the company's latest earnings call. He also noted that it has reached "historic highs in every geographic segment, in every product category.

The larger the installed base, the more users the company is able to monetize through its own and third-party services. And Apple is doing just that. "The number of transactional accounts paid accounts, paid subscriptions is growing, so the level of engagement continues to grow," Maestri said.

That trend should help Apple's services segment, which accounts for about a third of the company's gross revenue, continue to post double-digit YoY growth rates in most quarters for the foreseeable future."

So is Apple justifying its $2.8 trillion market capitalization? Well, it does. Moreover, there is likely a clear path to $3 trillion or more. And thanks to stock buybacks, the stock price could grow faster than Apple's market capitalization.






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