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Amazon Stock Will Move Higher as Free Cash Flow Grows

Investing in AMZN stock both before and after its earnings release will ensure a good average cost

Amazon (NASDAQ:AMZN) has risen 73% so far this year on the back of accelerating e-commerce. Fortunately for investors, AMZN stock is poised to move even higher as the company’s cash flow keeps flowing. For a front-row seat to Amazon’s potential, look for its second-quarter report on July 30.

Amazon (AMZN) logistics center in Szczecin, Poland.
Source: Mike Mareen / Shutterstock.com

For example, in the last 12 months (LTM), Amazon generated $24.3 billion in free cash flow. This was up from $23 billion in the LTM period ending Q1 2019.

This is important since Amazon seems to highlight its FCF growth. Barron’s Jack Hough pointed out earlier this year that CEO Jeff Bezos has emphasized FCF over accounting earnings since the company’s start.

Amazon does not care as much if net income is positive or shows positive growth. For example, last quarter, the company’s earnings per share fell to $5.01 from $7.09. But next year analysts see explosive growth in earnings and FCF coming down the pike.

Estimates for Amazon’s FCF Growth

According to one poll of 46 analysts, the average estimate for 2021 earnings is almost double this year’s earnings. For example, EPS for this year is expected to be $18.91. But in 2021 analysts foresee $37.47 per share in earnings.

Based on these estimates, the 70% rise in AMZN stock does not seem unwarranted. For example, that puts the stock on a forward price-earnings ratio of 79 times. That is expensive. But if you look at it from a free cash flow standpoint, it does not seem as high.

For example, last quarter, the company made $24.3 billion in FCF from $296.3 billion in LTM sales. That works out to an 8.2% FCF margin. Going forward, this same margin should likely increase once the novel coronavirus dies down or a vaccine is prevalent. As an example, in Q2 2019 the same LTM FCF margin was 9.9%.

So estimating FCF for 2021 we can use that 9.9% margin rate. Assuming sales rise to $409 billion, based on Yahoo! Finance estimates, the expected FCF will be a massive $40.9 billion. That is 66% higher than the $24.3 billion LTM FCF in Q1.

So you can see why AMZN stock has risen over 70% in anticipation of this massive increase in expected FCF growth. FCF should explode over the next year. Now Amazon just needs to perform.

What Analysts Are Saying

One analyst on CNBC said recently that AMZN stock could rise another 20% or so. Nancy Tengler, chief investment officer at Laffer Tengler Investments, said the company’s fast sales growth will push the stock higher.

Another analyst implied to CNBC that the stock will rise since institutions will need to play catch-up from not owning it. This analyst, Craig Johnson, of Piper Sandler, said that after earnings are released that sell-side analysts are going to have to raise their estimates. That will tend to push the stock higher as well.

But that is not all. Analysts made big moves yesterday with AMZN stock. Goldman Sachs and Jefferies both raised their price targets to $3,800. This is because they see “accelerating e-commerce” boosting the stock.

The Bottom Line on AMZN Stock

Typically the stock rises well in advance of a huge outbreak in FCF and earnings. This year’s rise is discounting an outlook where Covid-19 restrictions are no longer hampering global economic growth.

This also makes it difficult to invest in the stock at these levels, since most will be looking for a cheaper entry point. But this may not be possible. The odds seem to imply that growth will be accelerating once Covid-19 vaccines are prevalent.

With that in mind, I suggest that most investors consider using an average-cost approach. Set an amount of money that you would normally invest in the stock on a regular basis. Then over time, purchase those shares. Some will be at higher prices, and some potentially at lower prices. This will help you avoid the waiting game for lower prices which may never come in AMZN stock.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guidewhich you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/amzn-stock-poised-further-heights-as-cash-flow-surges/.

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