Expect Amazon Stock To Move Up, Fueled By Its Powerful Free Cash Flow

Amazon (NASDAQ:AMZN) will report its fourth-quarter and full-year 2020 earnings on Feb. 2 after the market closes. The report will likely push Amazon stock higher due to expected powerful earnings and free cash flow (FCF) numbers.

Walmart's Robot Is Only a Minor Threat to Amazon Stock
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For example, last quarter analysts were expecting earnings around $7.25 per share and they came in well above that at $12.37 per share. This quarter analysts forecast $6.96 earnings per share (EPS). Expect to see another blowout quarter as well.

Moreover, FCF will likely be even higher than before. I believe that Amazon stock trades based on its FCF yield, which is its FCF divided by the stock price.

As a result, expect to see Amazon stock move closer to my price target of $3,796. This is based on a FCF yield of 1.65%.

By the way, since my Oct. 21 article on Amazon, the stock has indeed moved higher. On that date, Amazon stock closed at $3,184.94. That means it has gained $109.06 or 3.4% in the past three months or so.

That is not as much as I was expecting, but on the other hand, I had forecast a price target of $3,741.85, or 16% plus more over the next year. Therefore, over the last three months, it has moved up about a quarter of that amount. So, in a sense, my forecast is still on track.

What To Expect From Q4

Analysts surveyed by Refinitiv see EPS as high as $7.17 for Q4, and $34.93 for the year 2020. Moreover, EPS for 2021 is forecast at $45.54.

This puts Amazon stock on a forward price-to-earnings (P/E) multiple of 72 times 2021 earnings. From that standpoint, the stock is not cheap.

However, it is probably better to look at Amazon stock using its free cash flow. This gets rid of all the noncash charges and other nonsense in GAAP earnings that don’t relate to cash earnings.

For example, last quarter Amazon made $25.018 billion in FCF in the last 12 months (LTM). Compared to its $347.945 billion in LTM sales, this worked out to 7.19% of sales.

Therefore, since analysts are forecasting sales for 2021 of $441.91 billion, 7.19% of that number works out to $31.376 billion.

We can use that number to forecast the stock price. For example, with a 1.65% FCF yield, the market capitalization would be $1,901.6 billion. That implies a gain of 15.2% gain over its existing $1,650 billion market cap.

This implies the stock should be $3,796, or 15.2% above the Jan. 25 price of $3,294 a share.

What’s Next For Amazon Stock

I am not the only one who believes that Amazon stock is undervalued. For example, TipRanks reports that 32 analysts have written reports in the last three months with 12-month targets on AMZN stock. Their average price target is $3,831.32. That represents a 16.3% increase over current levels.

That is close to my price target of $3,796, based on my estimate of its powerful FCF. Marketbeat says 48 analysts cover the stock. The consensus price target is $3,670 per share, or more than 11% higher than today.

If Amazon tops expectations with blowout earnings, then investors might see AMZN stock hit my price target much sooner than otherwise foreseen. For example, my price target is basically a target for the next 12 months. But if FCF comes in much higher it is possible the stock could hit $3,786 much sooner.

Investors should pay particular attention in the Q4 earnings to what Amazon guides for earnings and free cash flow for the next 12 months. That should offer a gauge of whether Amazon stock will hit this 15% target over the next year sooner than later.

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.

Mark Hake writes articles on personal investing at mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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