Amazon (NASDAQ:AMZN) will report its third-quarter earnings on Oct. 29 after the market closes. I expect this report will help move AMZN stock higher as Amazon likely will produce powerful earnings and free cash flow (FCF) results.
For example, analysts expect the company to produce $7.05 to $7.25 earnings per share (EPS) in Q3. This would be much higher than the $4.23 in earnings last year. But it would be lower than the prior quarter EPS of $10.30.
However, keep in mind that last quarter the company vastly outperformed expectations. It is possible that this could occur this quarter as well.
Free Cash Flow Growth Expected
But more importantly, Amazon will likely produce large increases in free cash flow (FCF). I have written several articles about its powerful its last 12 months (LTM) FCF gains.
For example, I estimate that the company will produce $35.4 billion in FCF for the 12 months ending Dec. 31. This is based on my assessment of its FCF conversion of net income into FCF, as I discussed in my Aug. 26 article on Amazon.
Amazon’s ability to generate higher and higher FCF levels is important because it affects how the market values AMZN stock. I explained this in both of my last two articles, but here is the reason in a nutshell.
The stock is related to the company’s FCF yield. You take the FCF dollars and divide it by 1.85%, its present FCF yield.
So, dividing $35.4 billion by 1.85% results in a market cap of $1.914 trillion. That is 16.75% higher than today’s market cap of $1.64 trillion. Therefore, AMZN would be worth $3,741.85 per share, up 16.74% from today’s (Oct. 19) price of $3,207 per share.
Prime Day Seems To Have Done Well
The company recently had a delayed Prime Day which seems to have broken records. The company said that third-party sellers had a 60% increase year-over-year. Their sales on Prime Day grew more than Amazon’s own retail sales. This is important for Amazon, nevertheless, since Amazon takes a portion of third-party sales.
I know a little bit about this. In the past, I had an FBA business (Fulfillment by Amazon) business. I got to experience how the company treats third-party sellers. This involved a mixture of both retail and online arbitrage.
For example, I remember one large arbitrage between Walmart (NYSE:WMT) and Amazon. Walmart found an online clearance sale on hunting gear for cameras to spot animals using motion-activation.
I bought four of these cameras at Walmart.com, had them shipped to me, and used the same boxes to resend them to Amazon’s fulfillment centers. Then I priced the gear at the regular MSRP prices. I made a 40% gain in about one month.
However, Amazon had a number of fees. They were 30% to 32% of the retail price. Therefore, I made a net gain of about 10% on the arbitrage trade. Amazon made more money than I did.
There are literally millions of people doing this very thing in the Amazon third-party FBA system. The most successful of these people create their own products and source their manufacturing in the U.S. or China. They stick their own labels and UPC codes on the products. But Amazon gets the same 30% margin cut. I sometimes think that Amazon might actually more margin on its FBA business than its own retail business.
What To Do With AMZN Stock
I have shown that AMZN stock is likely too cheap based on its powerful FCF. I also gave you an example from personal experience of how Amazon profits from their third-party FBA system.
But don’t take it just from me. TipRanks reports that 38 analysts have written reports in the last three months with 12-month targets on AMZN stock. Their average price target is $3,758.06. That represents a 17.2% increase over today’s price.
That is virtually the same as my price target of $3,741, based on my estimate of its powerful FCF. Marketbeat says 51 analysts cover the stock. The average “consensus” price is $3,440.56 per share, or more than 7% higher than today.
Either way, look for AMZN stock to move higher as it reports its results on Oct. 29.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.