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Apple Inc (AAPL) stock is set to rise again given its recent strong free cash flow results released on Jan. 30. Although lower than last year, its FCF margins were high at 25% during the previous 12 months. That augurs well for AAPL stock's value.
AAPL closed at $236.00 per share on Friday, Jan. 31. That is well off its recent high of $259.02 on Dec. 26.
But could AAPL rise again to new highs? It seems very likely, given that its value could be significantly higher based on its FCF margins and a reasonable FCF yield valuation.
This article will show why and how to best play the upside.
Strong But Lower FCF Margins
Although Apple's quarterly revenue rose 4% to $124.3 billion year over year, its operating cash flow (OCF) was significantly lower than last year. It was $29.9 billion, compared to $39.9 billion a year ago.
Moreover, its OCF margin declined from 33.4% of sales to 24.1% in the latest quarter. Given that Apple's capex spending rose slightly, free cash flow (FCF) fell from $37.5 billion to just $27 billion in Q4 2024.
As the table below shows, the FCF margin fell precipitously from 31.4% last year Q4 to just 21.4% in Q4 2024.
But that is the bad news. It's already discounted in the stock price. For example, over the last 4 quarters the company's margins have been falling, so the market is used to this.
Part of the problem is that the company is moving its production out of China to higher-cost areas. Moreover, its R&D and capex spending has been rising.
For example, a year ago, capex represented 2.0% of quarterly sales (i.e., $2.4 billion/ $119.6 b in sales), but in Q4 2024 it rose to 2.4% (i.e., $2.9b/$124.3b sales).
By the way, this is a lot lower spending on capex and AI than some of its technology peers. Meta plans on spending over $65 billion on capex, compared to a likely run rate level of $10.8 billion at Apple.
Maybe that could account for the tepid sale of iPhones in China, which dropped 11% YoY.
Nevertheless, Apple is cautious about diving headlong into AI. Moreover, iPhones that already have AI Intelligence have done better, according to the company's newly appointed CFO, the WSJ reports.
As a result, we can forecast Apple's FCF, given its steady approach to capex spending.
Forecasting FCF and FCF Margins
For example, analysts now project sales this fiscal year to Sept. 30, 2025, will rise +4.4% to $408.7 billion, and next year up +8.7% to $443.5 billion. That implies a run-rate next 12-month (NTM) revenue of $426.1 billion, or 9% higher than last fiscal year's $391 billion.
Moreover, the table below shows that in the last 12 months (LTM), Apple has averaged 25% FCF margins. So, being conservative using a 23% FCF margin estimate, Apple could generate higher FCF:
As a result, Apple may be able to generate between $96 and $105 billion in FCF annually over the next 2 years. That averages out to $100.6 billion in NTM FCF.
This allows us to estimate the stock's value using an FCF yield metric.
Price Targets for AAPL Stock
For example, let's assume that the market gives the stock an FCF yield of about 2.50%, or 40x FCF. That assumes that 100% of the FCF is paid out to shareholders over the next year ad the market gives the stock a 2.50% yield.
Here is how that would affect the stock price:
The table above shows that the market would value Apple between $3.8 trillion and $4.2 trillion, or $4 trillion on average. That is 13.5% higher than its present $3.545 trillion market cap.
In other words, AAPL stock is worth between $256 and $279 or $267.89 on average.
Analysts on Wall Street tend to agree that AAPL stock looks undervalued here. For example, Yahoo! Finance says its survey of 46 analysts results in an average price target of $251.83 per share, or +6.7% higher.
Similarly, AnaChart shows that 31 analysts have an average price target of $248.85 per share.
Strong Shareholder Value Returns
Moreover, the company also has a strong shareholder return policy that could push APPL stock's value higher. For example, in the last quarter, Apple spent all of its free cash flow (FCF), i.e., $27 billion, on $27.5 billion in share repurchases and dividends.
It has consistently been spending over 100% of FCF on its shareholders, as the table below shows:
The point is that Apple seems to be cautiously spending on capex to return $100 billion annually to its shareholders through buybacks and dividends.
Let's look at that more carefully.
For example, in the last 3 years, Apple's share count has fallen from 16.4 billion to just over 15 billion as of Dec. 31, 2024.
This means that its shares outstanding have fallen 8% over the last 3 years, or about 2.67% annually. That effectively increases the dividend per share (DPS) amount by 2.67% annually to shareholders, assuming that it keeps the dividend cost level.
Moreover, it helps push AAPL stock higher. This is from share buying activity pressure in the market, and also from an increase in its earnings per share (EPS). For example, even if net income stays flat, the EPS figure will rise by 2.67% annually. That could push AAPL higher if the multiple stays flat.
The bottom line is that investors have a low-tax return on capital from the company's strong free cash flow.
How to Play This
Out-of-the-money Puts. One interesting way to play AAPL stock, especially if you don't already have a position, is to sell short out-of-the-money (OTM) puts in nearby expiry periods.
For example, look at the March 7, 2025, expiration period, 34 days from now (i.e., 34 days to expiry or DTE). It shows that the $225 put option strike price has a mid-price premium of $3.54 per put contract.
That provides an immediate yield of 1.573% over the next month (i.e., $3.54/$225.00).
In other words, an investor who secures $22,500 with cash at their brokerage firm (or buying power), can enter an order to “Sell to Open” 1 put contract at this strike price. The account will immediately receive $354, or 1.388% of the $22.5K invested.
As long as AAPL stays over $225.00 the collateral secured will not be assigned to buy 100 shares at $255.00.
But even if that happens, it provides a lower buy-in price for the short-put investor. Moreover, the breakeven price is $225-$3.54, or $221.46. That is 6.16% below Friday's close of $236.00. In other words, it provides a good way to set a lower buy-in target price.But not everyone wants to invest $22.5K this way. Here is a more risky method that involves less cash outlay.
In-the-Money Calls. Look at the March 20, 2026 call option chain, over one year away from now. It shows that the $200.00 call option strike price has a premium of $53.30 in the mid-price.
That means that an investor only has to invest $5,330 to have exposure to 100 shares of AAPL over the next year.
Moreover, this is well below the trading price of $236.00, so it has intrinsic value. That is, the value of these calls is already worth at least $236.00-$200.00, or $36.00 per call. This represents 67.5% of the price paid of $53.30 for 1 call option (i.e., $3600 / $5330 = 67.5% intrinsic value.
In addition, if AAPL rises to our target price of $267.69 (see above) over the next year, these calls will be worth $67.00 (i.e., $267.69-$200.00 exercise). That provides a much higher potential return:
$67.69 / $53.30 price paid = 1.2699 -1 =+27.0% upside
An investor just owning shares in AAPL has an expected return (ER) of a 13.4% upside (i.e., $267.69/$236.00) at the target price shown above. So, the investor can effectively double their upside with a lower outlay than shorting OTM puts.
Of course, the downside is also leveraged as well. But at least there is some downside protection given that these calls are already in-the-money.
Summary
Here is the bottom line. Apple's lower free cash flow (FCF) this past quarter also implies that the company is purposefully controlling its capex spending in order to maintain shareholder returns.
This implies that AAPL stock is worth up to 14% more. Two ways to play this are to sell short cash-secured puts in out-of-the-money (OTM) nearby expiry periods, and to go long call options in one-year away in-the-money (ITM) strike prices.
