Is Advance Auto Parts (NYSE:AAP) Undervalued by 28%? A Deep Dive into Discounted Valuation and Earnings Potential

The debate over whether Advance Auto Parts (AAP) is undervalued by 28% hinges on a delicate balance between its troubled present and its aspirational future. With a stock price of $58.70 as of September 19, 2025, and a market cap of $3.417 billion, AAP has faced significant headwinds, including a 2024 net loss of $336 million and Q1 2025 revenue declines of 7% year-over-year due to store closures and supply chain challenges : Advance Auto Parts (AAP) Financials 2025 - MarketBeat^[1]. Yet, amid these struggles, analysts and models suggest a potential disconnect between AAP's intrinsic value and its current market price.

The Case for Undervaluation: Discounted Cash Flow Analysis

Discounted cash flow (DCF) models are a cornerstone of valuation analysis, and they paint a mixed but intriguing picture for AAP. According to a two-stage free cash flow to equity model, AAP's fair value is estimated at $83.12, implying a 28% discount to its current price of $60.12 : Is Advance Auto Parts, Inc. (NYSE:AAP) Trading At A 28% Discount?^[2]. Another DCF analysis pushes this gap wider, projecting a fair value of $116.51—a 50% undervaluation relative to the $58.70 price tag : AAP DCF Valuation - Advance Auto Parts Inc - Alpha Spread^[3]. These divergent estimates reflect the uncertainty surrounding AAP's ability to stabilize its cash flows.

The key to unlocking AAP's value lies in its projected free cash flow (FCF) growth. While the company reported negative FCF of -$96.17 million in 2024 and -$3.00 million in Q1 2025 : Advance Auto Parts (AAP) Free Cash Flow^[4], DCF models forecast a turnaround. For 2026 and 2027, FCF is expected to surge to $261.4 million and $310.0 million, respectively : A Look At The Intrinsic Value Of Advance Auto Parts, Inc.^[5]. These figures, if realized, would represent a dramatic reversal of fortune, driven by store optimization, reduced CAPEX, and improved gross margins.

To assess this, we apply AAP's weighted average cost of capital (WACC) of 6.32% : AAP (Advance Auto Parts) WACC - GuruFocus^[6], which reflects a blended cost of equity (11.57%) and debt (2.23%). Discounting the projected FCFs of $261.4 million (2026) and $310.0 million (2027) at this rate yields a present value of approximately $440 million. Adding AAP's $3.417 billion market cap to this discounted value suggests a total enterprise value of $3.857 billion—a 10% premium to its current market cap. However, this calculation assumes no further store closures or supply chain disruptions, which remain significant risks.

Earnings Potential and Strategic Reforms

AAP's earnings trajectory offers both hope and caution. For FY 2025, the company projects adjusted diluted EPS of $1.50–$2.50, below the $1.82 consensus : Advance Auto Parts (AAP) Financials 2025 - MarketBeat^[1]. Yet, forward-looking estimates for 2026 and 2027 show EPS climbing to $3.12 and $4.27, respectively : Advance Auto Parts Inc Stock Forecast, Predictions & Price Target^[7]. This acceleration is tied to management's restructuring plan, which includes closing 513 stores and 12 distribution centers by FY 2025 : Advance Auto Parts, Inc.: Financial Data Forecasts Estimates and ...^[8]. While these actions have temporarily depressed cash flow, they aim to streamline operations and reduce overhead.

The Pro segment, which serves professional mechanics, has shown resilience, with eight consecutive weeks of positive comparable sales in the U.S. : Advance Auto (AAP) Q1 2025 Earnings Call Transcript^[9]. This segment's growth could offset DIY segment struggles, where consumer spending remains cautious. However, AAP's 30% blended tariff rate on 40% of sourced products : Advance Auto Parts Inc (AAP) Q1 2025 Earnings^[10] introduces volatility, as does its reliance on pricing adjustments to mitigate cost increases.

Risks and Realities

Critics argue that AAP's DCF-based undervaluation claims are overly optimistic. The company's negative free cash flow in 2024 and Q1 2025 highlights its liquidity challenges, and its 2025 free cash flow guidance of -$85 million to -$25 million : Advance Auto Parts (NYSE:AAP) Updates FY 2025 Earnings^[11] suggests near-term cash burn. Additionally, AAP's WACC estimates vary widely (6.32% vs. 7.1% : AAP WACC, Cost of Equity, Cost of Debt and CAPM | Advance …^[12]), reflecting differing assumptions about its risk profile. A higher WACC would significantly reduce the present value of future cash flows, narrowing the 28% undervaluation gap.

Conclusion: A Calculated Bet

The 28% undervaluation claim rests on AAP's ability to execute its restructuring plan and deliver on FCF projections. While the DCF models and earnings forecasts are compelling, they hinge on assumptions about operational efficiency, tariff mitigation, and market share gains. For investors, the key question is whether AAP's management can stabilize cash flows and capitalize on the $150 billion total addressable market through its planned 100+ new store openings : Advance Auto Parts Inc (AAP) Stock Price, News, …^[13].

In the end, AAP's valuation appears to straddle the line between opportunity and risk. A 28% discount may be justified if the company's turnaround plays out as planned—but only time will tell if the market's skepticism is warranted or if AAP can roar back to relevance.