Stock Prices Always Follow Free Cash Flow Per Share Over Time

Authored By Louis Stevens

This is the second part of what is now a two part series, the first part of which you may read via this link.

In the first part of the series, I illustrated that stock prices always follow free cash flow per hare over time, and I provided the four points of equity value that explain why this is the case.

Today, we will explore examples of businesses whose free cash flow per share is soaring, but their stock prices are languishing.

To be sure, these charts are a bit crude, and they do not take into account all four points of equity value, hence they do not paint the full picture in understanding the value of these businesses.

That said, stock prices do eventually follow their free cash flow per share, granted free cash flow per share continues to grow over time.

And, to this end, I believe this exercise will be worthwhile for us as a matter of future perspective: We will be able to look back on these businesses and review whether their share prices ultimately followed free cash flow per share. If, in some cases, the share prices do not follow free cash flow per share, we will be able to look back and study what went wrong.

As always, LAS' buy or sell ratings are disclosed in the concluding portion of its Briefs and Equity Research notes. So, without further ado, let's begin!

Affirm's Free Cash Flow Per Share Has Soared While Its Stock Price Has Languished

As we can see, Affirm's share price has largely declined as its free cash flow per share has soared. Affirm provides consumer credit as its main product, which is a highly cyclical product, so we should certainly consider the durability of these cash flows (the third point of equity value) so as to inform what price to free cash flow multiple it should receive over time. That said, its free cash flow per share has been soaring while its stock price has declined, and that's worth noting.

Grab's Free Cash Flow Per Share Has Soared While Its Stock Price Has Languished

Grab was overvalued in 2021; however, it's now trading at a discount to itself: By which I mean Grab is literally and figuratively the Uber of SE Asia, in that Uber sold its SE Asian division to Grab, and, today, Grab trades at a discount to Uber, despite having a higher growth rate than Uber.

Okta's Free Cash Flow Per Share Has Soared While Its Stock Price Has Languished

What's not reflected in the above chart is that Okta's growth rate has slowed (second point of equity value), and its guidance has been weak. That said, it could certainly reaccelerate growth and continue outperforming its guidance, which would cause its free cash flow per share to continue soaring.

S1's Free Cash Flow Per Share, Though Negative, Has Soared While Its Share Price Has Languished (It Turned Fcf Positive In Q1'24)

Despite S1's price action, its free cash flow per share has indeed soared, and it turned positive in Q1'24. With the Crowdstrike incident likely sending business S1's way, it will be interesting to see how this free cash flow per share trends over time.

Snowflake's Free Cash Flow Per Share Has Soared While Its Share Price Has Languished

Lastly, the once vaunted Data Super Cloud™ has as well experienced soaring free cash flow per share, while its share price has mostly declined.

To be sure, Snowflake was very overvalued in prior years; however, as free cash flow per share continues soaring, its share price will be forced to follow eventually, granted, of course, free cash flow per share continues soaring.

That's all for today! Thank you for reading.

Disclosures:

L.A. Stevens has rated S1 and Grab a "buy."

L.A. Stevens has not rated Okta, Snowflake, and Affirm.

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