Why Amazon Stock Should Run 40% Higher Sooner Than Later

Amazon (NASDAQ:AMZN) will release its Q2 results on July 29 after the market closes. Expect the company to release stellar earnings and free cash flow (FCF) for the quarter. That could be a boon for AMZN stock going forward.

Logistics activity on the Amazon site of Vélizy-Villacoublay in France. Packages are sorted by workers on coneyors.

Source: Frederic Legrand – COMEO / Shutterstock.com

I have written about the online e-commerce company in the past and its powerful FCF generating capability. Moreover, Amazon consistently produces large amounts of FCF and it focuses on this in its financial presentations.

However, it usually reports its quarterly results on a trailing 12 months (TTM) basis. It likes to do this since it doesn’t want analysts and shareholders focusing on any one quarter performance with FCF. This is especially the case since it makes so much more revenue and FCF during the Christmas-related season.

What to Expect In Q2

For example, in Q1, Amazon produced a TTM operating cash flow of $67 billion, up 69% from the prior TTM year. It also made TTM FCF $26.4 billion in Q1. Since its sales over that period were $254.52 (see its supplemental financial info page), this means its TTM FCF margin was 10.4%.

In other words, over 10% of every sales dollar in the last 12 months went straight to FCF.

Analysts expect the company will produce $115.07 billion in sales for Q2. That will be 29.4% higher than last year and 6% higher than the prior quarter of Q1. If this happens, then its TTM sales will be $445.288 billion. Assuming a 10.4% FCF margin, FCF will be $46.3 billion.

Moreover, analysts expect to see sales hit $490.27 billion for the year ending December 2021, according to Yahoo! Finance. If the company keeps making a 10.4% FCF margin over 2021, then FCF will reach $51.0 billion. That is a massive number, and over 93% higher than its Q1 TTM FCF of $26.4 billion.

We can use that number to estimate Amazon’s value.

What Amazon Stock Is Worth

Right now AMZN stock has a market capitalization of $1.82 trillion, as of July 27, according to Yahoo! Finance. So if we divide its TTM FCF of $26.4 billion as of Q1 by its market value of $1,829 billion, then its FCF yield is 1.44%.

Just to be conservative let’s use the forecast Q2 FCF of $46.3 billion. This assumes that the price today already incorporates an expectation of $46 billion in FCF. Therefore, if we divide $46.3 billion by $1.829 trillion, the FCF for Q2 on a TTM basis is 2.53%. In other words, the FCF yield is somewhere between 1.44% and 2.53%. Let’s call it 2%.

Here is why that is important. Assuming the full-year 2021 FCF estimate of $51 billion comes to pass (see above), then AMZN stock is worth $2.55 trillion. The reason is this is the result of dividing $51 billion by 2%. That implies it will rise by 39.4% from now to the end of the year (i.e., $2.55 trillion / $1.829 trillion – 1).

In other words, AMZN stock is worth 39.4% more than its price of $3,626.29 (July 27). That means it is worth $5,055 per share.

What to Do With AMZN Stock

I have shown that AMZN stock is worth over $5,000 per share if the company just makes what analysts are forecasting in sales. In other words, there are no heroic assumptions here. It seems highly likely this will occur, barring any unexpected events or results.

However, analysts on Wall Street are not as sanguine about the company as I am. According to TipRanks.com, 32 analysts have an average price target of $4,333 per share or about 20% over today’s price. Other sites like Yahoo! Finance have lower average price targets.

That’s too bad since I have a lot of confidence that my price target will work out. The higher its reported FCF is reported for Q2, the higher that its projected value will be. Expect to see AMZN stock hit 5,055 per share.

On the date of publication, Mark R. Hake did not hold any position in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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

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