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Warren Buffett's company Berkshire Hathaway has reportedly sold half its stake in Apple (AAPL) stock. But that doesn't mean you should as well. Apple's strong free cash flow implies AAPL stock is still a bargain today.
AAPL is down over 4.5% to $210.07 in Monday morning trading. That is after Apple reported on Aug. 1 its fiscal Q3 earnings for the period ending June 29. AAPL peaked earlier last month at $233.09 on July 15, down about 10% from its peak.
Berkshire Hathaway's Sales of AAPL Stock
News emerged this weekend that Berkshire Hathaway (BRKA) sold off half of its holdings in AAPL stock during the past quarter. That could also be dragging the stock down now.
Berkshire Hathaway already had an oversized position in the stock after first buying it in 2016. Buffett may just be trimming this stake.
For example, at one point, according to CNBC, it was up to 50% of Berkshire's equity portfolio. Buffett had already hinted during the annual meeting in May that he might sell off some of the stake. In other words, it's not likely he has lost confidence in the company.
It also doesn't mean investors in the stock now should copy this selling. By contrast, it looks like a good time to take advantage of the stock's weakness. This is due to the company's strong free cash flow (FCF).
Strong Free Cash Flow (FCF) and FCF Margins
For example, this past quarter Apple generated $28.858 billion in operating cash flow, based on data from Seeking Alpha. After deducting $2.151 billion in capex spending, free cash flow rose to $26.707 billion. That was significantly higher than the $20.69 billion of FCF in the prior quarter.
That capex spend encompasses the company's AI investments, including Apple Intelligence software products. They are due to roll out this fall to U.S. English users.
Moreover, Apple's FCF reached over 31.1% of its revenue of $85.777 billion during the quarter. This high FCF margin was even higher than the prior 6 months' FCF margin of 27.7%, as I pointed out in my June 4 Barchart article, “Apple Stock Could Still Be Undervalued Here Based on Its Powerful Free Cash Flow.”
In other words, almost a third of its sales go straight into its checking account balances. So, despite higher AI spending, Apple is gushing free cash flow.
That also implies that AAPL stock is worth significantly more.
Target Price for AAPL Stock
One way to see this is to apply the company's FCF margins against analysts' revenue forecasts for next year. For example, Seeking Alpha shows that 43 analysts have an average revenue forecast of $418.99 billion for the year ending Sept. 2025. That is 7.45% higher than estimates of $389.93 billion in sales this year.
Therefore, let's assume Apple makes at least a 27% FCF margin (similar to its $104.3 billion in FCF in the trailing months on $385.6 billion in sales). That implies that Apple's FCF next year could rise to $113.1 billion (i.e., 0.27 x $418.99b), a gain of 8.5% YoY.
This could also lead to a higher stock price. For example, assuming the market will give the stock a 2.8% FCF yield, its market cap could rise to over $4 trillion (i.e., $113.4b/0.028 = $4,039 billion). I discussed this FCF yield metric in my prior Barchart article on July 1.
Today Apple's market cap is about $3.226 trillion. So, this implies that AAPL stock is worth at least 25% more (i.e., $4,039b/$3,226b - 1 = +0.252). In other words, AAPL stock's price target, assuming it makes 27% FCF margins and using a 2.8% FCF yield, is $262.50 (i.e., $210 x 1.25).
The bottom line here is that AAPL stock looks undervalued here. It's not necessary to follow Warren Buffett in selling the stock. By contrast, it could be worth buying here.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
