Only five stocks that trade on U.S. exchanges boast market caps of $1 trillion or more. These giants share several common denominators, including dominating their core markets and delivering huge gains so far in 2023.
However, there are also some important differentiators between the stocks. Here's one key investing metric where Apple (AAPL +0.37%) and Google parent Alphabet (GOOG +0.31%) (GOOGL +0.25%) trounce the other stocks in the $1 trillion club.
Data source: The Motley Fool.
An underappreciated investing metric
As the chart shows, Apple and Alphabet have much higher free cash flow (FCF) yields over the last 12 months than Amazon (AMZN +0.38%), Microsoft (MSFT 0.95%), and Nvidia (NVDA +1.13%). I think that free cash flow yield is a greatly underappreciated investing metric.
Investment research company New Constructs (the source of the chart data) calculates free cash flow by subtracting a company's net working capital (excluding excess cash) and its change in fixed assets from its net operating profit after taxes (NOPAT). It then determines the FCF yield by dividing FCF by enterprise value (EV).
Free cash flow provides an even better view of a company's financial shape than earnings do. Businesses can manipulate their earnings figures in several ways that they can't do with free cash flow.
You'd expect a larger company to generate greater free cash flow than a smaller company would. That's where FCF yield is helpful. It allows investors to easily compare companies of different sizes. The greater the FCF yield is, the more attractively valued the company is.
Why such a big gap in the $1 trillion club?
It's not surprising that Apple and Alphabet sport solid FCF yields. But why is there such a big gap between the two leaders and the other members of the $1 trillion club?
There's an easy answer with Amazon. The e-commerce and cloud services leader generated negative free cash flow in several recent quarters, due in part to its heavy investments in infrastructure and logistics.
Microsoft doesn't come close to delivering the same level of NOPAT as Apple does, which explains why it trails Apple so much on FCF yield. It does have a higher NOPAT than Alphabet does.
However, Microsoft's enterprise value is much larger than Alphabet's. As a result, Alphabet claims a higher FCF yield.
MSFT NOPAT (TTM) data by YCharts
Nvidia's main issue is that it's not in the same league in terms of free cash flow generation as Apple and Alphabet are. The chipmaker's enterprise value has also skyrocketed more this year than any of the other stocks.
Don't judge these stocks by one metric
Even with FCF yield, it's important to keep in mind that the dynamics for a given stock can change. For example, Amazon is now generating strong positive free cash flow after a period of producing negative free cash flow. Nvidia's free cash flow has also soared in 2023 thanks to surging demand for its graphics processing units.
One of the biggest drawbacks to any investing metric is that it only tells you where a company has been, not where it's going. FCF yield won't give investors a good picture of a stock's growth prospects. Most other metrics won't either.
I think that FCF yield is absolutely an important metric to consider when buying stocks. However, don't judge these high-flying $1 trillion club members (or any other stocks, for that matter) by only this one metric. Apple, Alphabet, Amazon, Microsoft, and Nvidia each have growth drivers that could make them appealing to investors.
