Amazon (NASDAQ:AMZN) stock has had a very strong December since I last wrote about the company. In that article, I estimated that AMZN would generate free cash flow (FCF) for 2019 of at least $16.6 billion.
My predictions for the company were wrong. I thought Amazon stock was already too high, based on its high FCF yield. Where did I go wrong?
First of all, I should have stuck with my original analysis. I reviewed AMZN stock on a sum-of-the-parts (SOTP) basis.
In that article, I set the company’s SOTP at $2,363 per share. That is almost 25% higher than the current Amazon stock price. And the upside to AMZN’s SOTP was even higher than when I wrote up the stock in December.
I should have used that as a guiding point.
Falling Free Cash Flow
But my estimate for FCF is likely correct. Moreover, in the chart below, you can see that the company expects FCF to be lower for 2019’s fourth quarter.
This shows that my estimate for free cash flow over the last 12 months will be 15% lower than last year. I wrongly guessed that since FCF is expected to be lower, that AMZN stock would fall.
But like I said, my original analysis is that AMZN stock is worth over 25% higher than its current share price in a SOTP breakup analysis. Moreover, Amazon is all about the long term. It invests for the long term.
More investments are are the result of higher capital expenditure. This lowers FCF. So, a lower FCF estimate means that Amazon is actually investing for higher returns in the future.
In a sense, the company is giving up cash flow now in order to have higher cash flow in the future. That is where I went wrong. Especially since Amazon stock is still worth significantly more than its present price.
What Other Analysts Are Saying About Amazon Stock
Other analysts also agree with my assessment that Amazon is investing for future growth. One Seeking Alpha analyst points out that Amazon is perfectly positioned for the expected increase in online sales over the next few years.
After all, e-commerce still accounts for only 11.2% of total sales, the analyst points out. This gives Amazon huge room for growth as the online “pie” gets bigger.
Another analyst points out that one of the main drivers for revenue acceleration is Amazon’s transition to one-day Prime delivery. This takes a certain amount of investment and capital expenditure.
So it makes sense that lower FCF is actually a good thing for the long term. It means that Amazon is looking to spur further growth in the future.
Bottom Line: Take a Long-Term View With AMZN Stock
Amazon is one of the few businesses that has prepared its shareholders to be patient with lower FCF and earnings. It has worked out quite well for the company.
As one analyst pointed out, only those who are focused on the long term should consider buying Amazon shares.
For example, Barron’s Jack Hough recently wrote that says in five years Amazon will be the largest free cash flow generator in the U.S. He says Amazon is a FCF “rocket ship” and investors should jump on board.
I believe that my original analysis still holds true. AMZN stock is worth close to $2,363 per share. Existing investors should continue to hold on and new investors should take the long-term approach to Amazon stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake writes the Total Yield Value Guide which analyzes stocks that are significantly undervalued. Subscribers receive a 2-week free trial period. Subscribe here.
