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.

Apple is a Stock Advisor selection. Nokia and Microsoft are Inside Value picks. Google is a Rule Breakers recommendation. Try any of these market-beating newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and Google, and a stock position in Nokia, at the time of publication. The Motley Fool's disclosure policy, like Ice Cube, is all about the Benjamins.


Read/Post Comments (2) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2008, at 4:36 PM, SteveTheInvestor wrote:

    Do I think iPhones are toys for the rich? Yeah... pretty much (or for those that want to spend like they are rich). Personally, I would never own one. The never ending monthly fees for using one are absurd unless one is on the road constantly. But just because I would never buy their products doesn't mean I would never buy their stock. I have yet to buy AAPL, but I'm giving it some consideration. The price is a bit more reasonable now. I still don't view it as a screaming bargain in this market environment but probably worthy of small incremental purchases on dips. As for the historic cash flow, I don't see that as being overly relevant. The key word there is "historic", as in having little to do with the future. I see Apple fighting a bad economy for the next year or two. Price appreciation, if it comes, will likely just be more speculation by the market. They need another killer product in that the iPhone is old news.

  • Report this Comment On December 03, 2008, at 11:26 PM, idannyb wrote:

    Tim,

    Nice article ... Full of good data and info pertinent to Apple / AAPL.

    Wish I had all of the transcripts of pundits and telecom analysts who went on CNBC and any media that would allow them to spout their bought and paid for messages ... specifically that iPhone would never be able to compete with the gargantuan (established) handset manufacturers like RIM and Nokia. Blah blah ...

    I've been a day one iPhone owner and it is the best generation one product I've ever owned. The beauty is that its not a prisoner to fix buttons and through the magic of software updates it continually evolves into a new phone with new services and value.

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