Amazon (NASDAQ:AMZN) released its earnings on Feb. 2 showing that Amazon generated significantly higher free cash flow (FCF) for the year ending Dec. 31. As a result, I estimate that AMZN stock is now worth much more at $4,853 per share, or 49% above today’s price.
This is much higher than my previous price target of $3,796, as I believe now that its FCF is going to be possibly as much as 100% higher over the next year.
Powerful Free Cash Flow
Amazon is one of the very few companies in the public markets that focuses almost exclusively on its free cash flow. For example, this is what the company talks about first in its press releases of earnings.
It typically likes to show its previous 12 months of FCF, in order to iron out the seasonal fluctuations in quarterly FCF. You can see this in the chart I have put together below.
This also includes my forecasts of their next four quarters of the trailing 12 months (TTM) of FCF.
Based on the strength of its sales growth, its FCF growth and its FCF margins, I project that Amazon will hit $42.3 billion in TTM FCF in Q1. This is 37% higher than the $31 billion in FCF as of Q4.
This also grows to $47.3 million as of Q2 2021. That represents an annual run-rate growth of 52.5% over the Q4 2020 results.
You can also see that I project that TTM FCF will grow to $63.6 billion by Q4. As each quarter progresses I will massage that number. However, I feel fairly strongly that the Q1 and Q2 estimates will happen.
These estimates are based on my FCF margin and operating margin estimates. You can see this in a condensed format in the table below.
I have circled the sales growth estimates, the FCF and the FCF margin estimates. This is what drives the forecast.
This also allows us to derive a forecast for AMZN stock, based on its FCF yield.
What AMZN Stock Is Worth
My estimate for AMZN stock is based on its free cash yield. FCF yield is the TTM FCF divided by the market price of the stock.
In the chart at the right, I show the price of AMZN stock as well as its quarterly FCF yield. The bars in the green show my estimates based on the FCF yield.
For example, in Q2 the TTM estimate is $47.3 billion. If we divide this number by 1.9%, its average FCF yield for the past three quarters, the Amazon market capitalization will be $2.489 trillion.
I estimate there will be 512.8 million shares outstanding. Therefore, the price target is $4,853 per share (i.e., $2.489 trillion divided by 512.8 million shares).
You can see my calculations in the table at the right.
Note that if the TTM FCF continues to surge this year, the price target will also spike.
However, I have a good deal of confidence in the Q2 estimate for TTM FCF. This is based on the company’s outlook and stellar performance in the last quarter.
What to Do With Amazon Stock
Assuming that FCF continues to surge this year, it is going to be hard to hold AMZN stock back. That is why I estimate it will spike at least 49% above the current price of $3,255.
In fact, I am probably being too conservative. For example, in the past two quarters, AMZN stock has been well below 2% FCF yield. So if the yield falls to 1.82%, AMZN stock could spike even higher.
It may take some time for Wall Street and the market to catch up. But it is not uncommon for AMZN stock to spike once analysts start to raises their estimates.
For example, TipRanks.com now reports that the average of 31 analysts’ price targets in the past three months is $4,104.13 per share. That represents a potential gain of 26% over today’s price. But as these same analysts update their FCF forecasts during 2021, their price targets are also likely to rise as well.
Therefore, if you hold AMZN stock you might consider adding to it, and if not consider taking a new position.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.