Cash Flow Valuation of Top 5 SP 500 Names

The Top 5 Technology names in the SP 500 as of tonight are Microsoft, (MSFT), Apple, (AAPL), Amazon (AMZN), Facebook (FB) and Google (GOOGL).

These 5 name snow comprise between 20% and 21% of the SP 500.

Technically Amazon is Consumer Discretionary, and Facebook and Google (Alphabet) are Communications names, but for all practical purposes it’s all “tech”.

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Like clockwork, at least 20 times a year I get a note from a reader saying / complaining, boasting that “EPS is rigged, the Non-GAAP numbers are gamed and i look at straight GAAP, because I’m really smart” and well, you know I shake my head and think “what a misguided individual” (sorry, this won’t endear readers to the blog, but it needs to be said).

One way to check quality of earnings for any company, let alone a tech company is compare net income to cash-flow OR get another valuation look at what you think is a high P.E company, look at the price-to-cash-flow or price-to-free-cash.

That’s what most retail investors miss – they read a “GAAP vs Non-GAAP” article and think “this is the way, the truth, and the light and I have found it” and the real answer is “well, not so much”. What investors sometimes don’t get is that GAAP earnings are riddled with “non-cash expenses” which ultimately don’t impact cash-flow thus look at cash-flow and free-cash as a litmus test.

The above spreadsheet shows the cash-flow and free-cash-flow valuations on the 5 largest names in the SP 500 as of tonight’s close and the comparison PE’s.

All the companies have price-to-cash-flow valuations tonight cheaper than their respective PE ratio’s. That’s a good sign.

I also wanted to show and cash and short-term securities as a % of market cap to highlight the liquidity and cash-generation of these companies.

Granted the free-cash-flow yields (4-quarter trailing free-cash-flow divided by market cap) aren’t as large as they were in April ’20 but they are still higher than all the Treasury yields and even higher than the yields on a lot of corporate investment grade bond funds.

Occasionally i like to lob an earnings preview or earnings redux into Seeking Alpha: last week, this article was written on Oracle ( and not one reader commented on the quality of Oracle’s free-cash-flow. I even cited Microsoft as a comparison.

It was surprising to read that Oracle’s free-cash-flow was less than it’s equivalent net income over a period of time.

There is more to this but it would make for a longer, more boring article.

As always thanks for reading.




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