Assessing Apple’s Future: Impact of FCF Margin Decline on Apple Stock

Apple Stock

Apple Inc. (NASDAQ:AAPL), a tech giant with a track record of impressive financial performance, is facing a recent drop in its free cash flow (FCF) margins. With FCF margins slipping from over 28% in the last fiscal year to 21% in the latest quarter, questions arise about the potential impact on Apple stock.

FCF Margin Analysis

The decline in Apple’s FCF margins suggests a potential shift in its internal cash generation dynamics. In the fiscal year ending September 2023, Apple generated nearly $100 billion in FCF, constituting 26.1% of its $383.3 billion total revenue. However, the previous fiscal year saw higher FCF and margins, with $111.4 billion in FCF and FCF margins at 28.3%.

While the services division demonstrated an increase in margins, the overall FCF margins for the company dropped to 21.7% in the latest quarter. If this trend persists into the coming fiscal year, investors may witness a dip in AAPL stock performance.

Best-Case Scenario

Despite the concerns, a best-case scenario assumes a consistent 26% FCF margin throughout FY 2024. Analysts project revenue to approach $400 billion, and with a 26% FCF margin, FCF could reach $104 billion, a 4% increase from 2023.

Under this scenario, Apple stock might see a modest 4% rise, with a target price of around $197, assuming the 30x FCF multiple remains constant.

Strategies for Flat Stock Price

In the face of a potentially flat stock price, existing shareholders might consider alternative strategies to enhance income. One approach involves selling short out-of-the-money (OTM) puts and calls with near-term expirations.

For instance, selling the $200 strike price puts with a 28-day expiration period could yield a covered call yield of 0.238%, surpassing the annual 0.50% dividend yield. Repeating this strategy monthly could result in an annualized expected return of 2.86%.

Another strategy is selling short OTM puts, such as the $175 strike price puts, which are over 7.75% below the current price. This approach offers an immediate yield of 0.217%, providing an alternative to covered calls with slightly less risk.

In conclusion, if AAPL stock is anticipated to stall over the next year, shareholders might find value in implementing short OTM puts and calls to navigate potential flat performance.

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