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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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