occupyS&P 500 IndexThe “Big Seven” technology companies with the largest weightings are the main force driving the index’s recent rise. Until last week, Tesla among the “Big Seven” (TSLA-US)’s performance fell short of expectations, causing its stock price to fall sharply, with its market value falling below that of Berkshire Hathaway Holdings (BRK.A-US).
Microsoft among the “Big Seven” (MSFT-US)、Alphabet (GOOGL-US), Amazon (AMAZN-US) and Meta Platforms (META-US) released its financial report this week, Apple (AAPL-US) will release its financial report next week, Huida (NVDA-US) will release its financial results before Thanksgiving. This year the price-to-earnings ratio of the “Big Seven” has climbed from 29 times to 45 times. Are they in a bubble?
Wall Street has a method for judging bubbles, called discounted cash flow analysis, or “DCF analysis,” which is the basis for analysts to give target prices and buy, hold and sell ratings.
However, Barron’s columnist Jack Hough proposed another equation that does not require too much math and reduces uncertainties. He calls it “disgruntled crash-flop electrolysis” or “DCFE analysis.” .
Take buying the stocks of the “Big Seven” as an example, using the expected rate of return to estimate how much cash flow needs to be created in 5 years; then go back and study and analyze the company’s recent cash flow trend to judge whether it can create so much cash flow. Finally, the ratings of “buy”, “equal” and “don’t buy” are obtained.
Take Apple, the largest among the “Big Seven”, as an example. A compound annual return of 12% would take its current share price of $175 per share to just over $300 in five years. Judging from the current steady decline in market capitalization and number of outstanding shares, Apple’s future market capitalization is estimated to be US$4 trillion. For a mature business like Apple, investors might expect at least a 4% free cash flow yield, or $160 billion per year. This is a level that even oil giant Saudi Aramco cannot reach.
But Apple’s annual free cash flow has exceeded $100 billion, and capital expenditures have not increased much, so even ordinary revenue growth may put it into a situation that it cannot spend. Apple’s rating is “Fair” and close to “Buy.”
Microsoft, Alphabet and Amazon are three other companies expected to join the $100 billion free cash flow club in the next few years. Amazon will take longer than the other two; plus, all three have regulatory risks, but given reasonable growth paths to free cash flow, today’s stock price doesn’t look outrageous.
Meta is the same, but the increase in free cash flow is smaller. The company’s management stopped chasing the Metaverse and started chasing artificial intelligence. Most importantly, it cut expenses. Free cash flow may exceed $30 billion this year and in a few years. It will be close to $50 billion.
Estimating the free cash flow growth prospects of Huida and Tesla is more difficult. Pre-pandemic, Huida was generating billions of dollars in free cash flow annually, and the current valuation means that within a few years the company’s free cash flow will be similar to Meta’s, which is $50 billion, or the company will continue to grow at an unacceptable rate. Confidence grows at a rapid pace, or both at the same time, because Huida is one of the most powerful companies in the field of artificial intelligence.
Tesla’s stock price fell 9% in one day last week. The company’s third-quarter financial report showed that Tesla increased its price cuts in order to increase sales. This shows that in order to justify the current stock price, Tesla needs to create more free cash. flow. Both companies have a “don’t buy” rating on their stocks.
2023-10-24 14:06:19
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