Just over a decade ago, the top tech companies in the world were trading on free cash flow yields of around 10 per cent. That metric has since halved, even as free cash flow generation itself has shot up.
Decade-old valuations are worth revisiting as Apple (US:AAPL), Amazon (US:AMZN), Alphabet (US:GOOGL), Meta (US:META) and Microsoft (US:MSFT) were already trading at multiplies considered overstretched at the time. Microsoft was the most affordable at a share price of 10 times free cash flow, while Amazon was at 243 times free cash flow (given its huge capital spending levels).
At the time, there were still questions over how essential these businesses would prove to be. However, looking back at the amount of cash they have generated over the past decade shows how badly undervalued they were at the time. In 2013, Meta generated $2.9bn of free cash flow, by 2021 this had risen to $39bn. Meanwhile, Alphabet’s rose over five times to $67bn in the same period.