Discounted cash flow valuation is the most used method by analysts to determine the fair value of a stock. Except for early-stage growth companies, analyst focus is on the company’s potential to deliver robust cash flows on a consistent basis. It therefore makes sense to consider exposure to high growth cash flow stocks for the portfolio.
For blue-chip companies, cash flows are usually robust. Therefore, these companies are positioned to consistently increase dividends and create value through share repurchase. Identifying future cash flow machines can result in multibagger returns. As free cash flow swells, the company’s valuation adjusts on the upside.
A good example is Apple (NASDAQ:AAPL), which is delivering operating cash flow in excess of $100 billion annually. Strong OCF also provides ample headroom for aggressive investments. This column discusses three stocks with growing cash flows. In the next five years, the market valuation of these stocks will be significantly higher on the back of cash flow visibility.
Li Auto (LI)
Li Auto (NASDAQ:LI) is my first pick among high growth cash flow stocks. LI stock has trended higher by almost 50% for year-to-date 2023. Considering the positive business developments, I expect the EV stock to remain in an uptrend.
It’s worth noting that Li reported operating and free cash flow of $1.13 billion and $975.9 million respectively for Q1 2023. Given the growth in vehicle deliveries, Li Auto is positioned for OCF in excess of $4 billion for the year. Further, as FCF accelerates, the company’s financial flexibility for global expansion will swell. I must mention that Li Auto’s vehicle margin is superior as compared to other Chinese EV peers.
In terms of deliveries, Li reported 146% year-on-year growth in deliveries for May 2023. The surge was on the back of new models and aggressive retail expansion. For the same reasons, deliveries are likely to remain strong through 2023.
Amdocs Limited (DOX)
Amdocs (NASDAQ:DOX) is another stock with growing cash flows that’s worth buying at current levels. At a forward price-earnings ratio of 16.2, DOX stock seems undervalued. Further, the stock offers a dividend yield of 1.82% and I expect healthy dividend growth in the coming years.
As an overview, Amdocs is a provider of software solutions and services to the media and communications industry globally. With presence in 90 countries, the company believes that the addressable market for its services will be $57 billion by 2025. This provides ample headroom for growth.
From a revenue and cash flow perspective, there are two important points. First, Amdocs has a current backlog of $4.11 billion and this provides clear revenue visibility. Further, the company has guided for $700 million in free cash flow for 2023. On a year-on-year basis, FCF will therefore increase.
With global presence, investment in next-generation cloud technology, and rising adoption of 5G, Amdocs is positioned to grow. A direct implication is further upside in free cash flows. I will not be surprised if annual FCF is in excess of $1 billion within the next 24 months.
Pinterest (PINS)
Pinterest (NYSE:PINS) stock might have disappointed investors, but I remain bullish on the company’s capability to deliver healthy cash flows. It would not be inappropriate to consider Pinterest as a proxy e-commerce platform with a strong global presence.
There are two important points to note when it comes to Pinterest delivering robust cash flows. First, for Q1 2023, the company reported 7% year-on-year growth in monthly active users to 463 million. Active user growth for the rest of the world has been robust.
Further, for Q1, the average revenue per user in U.S. and Canada was $5.11. For Europe, the ARPU was 74 cents. Finally, for the rest of the world, the ARPU was 10 cents. Therefore, there is a massive ARPU gap. If ARPU continues to grow at a robust pace in emerging markets, there is ample scope for EBITDA and cash flow growth. Even if the user base is stable.
It’s also worth noting that for Q1, Pinterest reported operating cash flow of $183 million. This already implies an annualized OCF potential of $800 million. As Pinterest gains traction as a proxy e-commerce platform and advertising revenue swells, the outlook is positive.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
