Bargain Stocks for Black Friday: Apple

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Trivia time. Name a stock that:

1. Has more cash than either Microsoft (Nasdaq: MSFT  ) or Google (Nasdaq: GOOG  ) .
2. Has claimed a fast-growing share of a massive-growth market.
3. Is valued at multiyear lows.

I'd stretch this out a bit, but you've already seen the headline, and you know the answer: It's Apple (Nasdaq: AAPL  ) , a current Stock Advisor pick. If you already own shares, great! You're right to own this stock. And if you don't ... what are you waiting for? A better buy-in price?

Well, yeah. At least, that's how CAPS investor djemcee put it in this pitch from last week: "Even though Apple has its loyal fans, the bottom line is that they are OVERPRICED and only command 8% of the PC market. The I-Phone is a silly gadget that appeals to a very small market segment."

The iPhone is silly? A bit player in a small market segment? Um, no:

Company	Q3 2008 Shipments	% Market Share	Q3 2007 Shipments	% Market Share
Nokia	15.485 million	38.9%	16.025 million	51.4%
Apple	6.899 million	17.3%	1.107 million	3.6%
Research In Motion	6.051 million	15.2%	3.298 million	10.6%
Motorola	2.313 million	5.8%	2.058 million	6.6%
High Tech Computer	2.308 million	5.8%	0.850 million	2.7%
All Others	6.791 million	17.0%	7.816 million	25.1%

Source: Canalys.

Look at those gains. Of all the smarty-pants handset makers, only Apple and Research In Motion (Nasdaq: RIMM  ) have buyers excited. Nokia (NYSE: NOK  ) ? Not so much.

But again, these are silly toys meant for rich people. Surely real handsets are winning, as they always have? Nope. New research from NPD shows that Motorola's (NYSE: MOT  ) lower-tech gadgets -- the not-so-silly RAZR, for one -- lagged the iPhone in third-quarter sales here in the U.S.

Brrrrrrrrring! Numbers calling!
Even so, you can't really understand what the iPhone means to Apple until you take a closer look inside the cash flow statement.

"The Company's cash generated by operating activities significantly exceeded its net income due primarily to the large increase in deferred revenue, net of deferred costs, associated with subscription accounting for iPhone," Apple says on of its 10-K annual report.

See, every iPhone sale is booked as if it were a monthly subscription, even though most of the cash is received at purchase. The implication? If you're valuing Apple using, say, the P/E ratio, you're grossly underestimating the impact of the iPhone. To wit:

Metric	FY 2008	FY 2007	FY 2006	FY 2005
Cash from operations	$9,596	$5,470	$2,220	$2,535
Capital expenditures	($1,091)	($735)	($657)	($260)
Free cash flow	$8,505	$4,735	$1,563	$2,275

Source: Capital IQ, a division of Standard & Poor's. Numbers in millions.

Talk about a massive cash generator. But, again, you wouldn't know that from the income statement. There, Apple recognized just $806 million of roughly $4.6 billion in iPhone revenue. ($3.8 billion was deferred, Chief Financial Officer Peter Oppenheimer told analysts during Apple's Q4 earnings call.) Note, though, that most of the growth in free cash flow is driven by increasing deferred revenue, which is linked to growth in iPhone sales.

The difference is staggering:

Q4 08 iPhone Sales	Recognized Revenue	Cash
Yield	$806 million	$4,600 million
Units  sold	6.892 million	6.892 million
Per-unit yield	$116.95	$667.44

Sources: Apple executive comments, filings.

Apple says in its Q4 data summary that iPhone revenue is derived from "handset sales, carrier agreements, and Apple-branded and third-party iPhone accessories." When you count all that -- a lot of which comes from AT&T (NYSE: T  ) -- each iPhone sold nets Apple a whopping $667 in cash. Not much of a price cut, is it?

But Mr. Market doesn't care. By historic cash flow standards, the iEmpire is cheap:

Metric	Current	Sept. 30, 2007	Sept. 29, 2006	Sept. 30, 2005
Enterprise value*	$58,080	$119,696	$56,487	$36,961
Free cash flow*	$8,505	$4,735	$1,563	$2,275
EV-to-FCF	6.83	25.28	36.78	16.25

Source: Capital IQ, a division of Standard & Poor's.
*Numbers in millions.

Color me impressed. Unless the growth in iPhone sales falls off a cliff, which appears unlikely in the near term, this stock is still a no-brainer buy.

Do you agree? Disagree? Click here to rate Apple in CAPS. And be sure to return next week, when our editors reveal the best Black Friday bargain.