Is Apple, Inc. Stock a Buy Before Earnings?

Even after the stock's recent run-up, is Apple still a buy? The answer may surprise you.

Jul 13, 2014 at 3:40PM

Attempting to time the market is a waste of time. There are just too many unknowns that can make a stock go up or down. That said, while there's no way to know whether Apple (NASDAQ:AAPL) stock will "pop" or sell-off after earnings are released on July 22, that doesn't mean it isn't a solid buy headed into the report.

Tim Cook Oct

Apple CEO Tim Cook speaking at last year's iPhone launch. Image source: Apple.

It's all about the risk/reward profile
Successful long-term buy-and-hold investors hold on to the fact that a stock's price, the majority of the time, will eventually follow business value. On that note, one of the best ways to invest in the stock market is to try to buy only sustainable and proven businesses that appear undervalued -- or at least reasonably priced.

An undervalued, sustainable, solid business means that there is little chance for things to go awry, and that the market could eventually begin to show greater appreciation for the underlying value of the business. In short, this scenario limits risk while providing upside potential, offering a good risk/reward profile.

Headed into Apple's third-quarter earnings report, the tech giant's stock seems to fit this description. Even though analysts predict Apple's earnings will grow at about 11.7% per year during the next five years, the stock trades at a conservative P/E ratio of just 15.9. And, as a proven leader in its respective markets, this is the sort of stock that could outperform expectations.

Here's another way to look at how cheap Apple stock is. Consider Apple's price-to-free cash flow ratio of just 13. Free cash flow is the metric that levels the playing field for different companies. It's what companies can use to build shareholder value through activities like repurchasing shares, paying out dividends, or saving for future capital expenditures.

AAPL Price to Free Cash Flow (TTM) Chart

AAPL Price to Free Cash Flow (TTM) data by YCharts.

While Google is still expected to grow its business at a faster rate than Apple, even slow-growing Intel boasts a meaningful premium to free cash flow compared to Apple. Further, there's no meaningful evidence that Apple's current levels of revenue, or its pricing power, are going to face any headwinds. In other words, Apple's current levels of free cash flow are likely sustainable over the long haul. And Apple's loaded pipeline of products for release in the near future should provide some near-term catalysts for Apple to meaningfully grow free cash flow per share in the next few years.

Apple Store Tmf

No wonder analysts are increasingly bullish on the stock. And putting icing on the cake, Morgan Stanley just dubbed Apple one of its fifteen "Vintage Values." This group of stocks, Morgan Stanley says (via Barron's), have a likelihood of realizing "superior risk-adjusted returns between now and July 2015."

The keyword here is risk-adjusted. Investors buying Apple stock today shouldn't expect to make a 50% return in one year. But with the stock's intrinsic value arguably around $120 per share, Apple stock does boast a sweet risk/reward profile.

I'd say investors are better off snapping up Apple shares before the earnings report, just in case shares "pop," and investors miss this buying opportunity. What if shares decline after earnings? Maybe consider boosting your position.

This small company may win big on Apple's next big product launch
Apple's so-called iWatch will almost undoubtedly shake up an entire industry. But one small company may benefit from the likely enormous adoption of these smart wearable devices more than Apple. Even better, its small stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, just click here!

Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers