Amazon Could Be Worth 40% More Despite Prime Membership Worries

• Amazon (AMZN) will report its first-quarter earnings on Thursday, April 28 after the market closes.
• Analysts and investors are worried Prime memberships may take a hit, similar to the recent Netflix (NFLX) debacle.
• AMZN stock still looks undervalued for the long term, likely worth at least $4,100 per share, or 40% more.

Amazon (NASDAQ:AMZN) reported stellar earnings on Feb. 3. for the year ending Dec. 31, 2021. It is now set to report its first-quarter earnings on Thursday, April 28 after the market closes. But year-to-date (YTD), AMZN stock has tumbled. As of April 25, it has fallen to $2,921.48, down 12.4% from $3,334.34 at the end of last year. In fact, it’s almost down to where it was trading on Feb. 3.

However, analysts are still bullish despite the factors pushing down AMZN stock. The company’s shares have considerable upside potential as a result.

Why AMZN Stock Is Down Right Now

Analysts and investors probably got spooked when Netflix (NASDAQ:NFLX) reported a 200,000 drop in its memberships stats last week. This was after it was projected to increase its memberships by more than 2 million.

The point is investors are afraid the same factors that caused Netflix to lose members could be affecting Amazon in its Prime membership growth. Other streaming company stocks have taken a hit as a result.

However, in the long run, analysts are still quite positive about AMZN stock. For one, Prime membership gives consumers more than just a movie and TV subscription benefit. For example, shipping costs for items on its site are significantly lower for members.

There are also other benefits that streaming companies cannot or do not offer. So, Amazon’s Prime membership could dodge the industry decline in streaming membership growth.

More importantly, Amazon is increasing prices for its Prime members. The annual fee will rise 16.8% from $119 to $139 and the monthly fee will go up by 15.4% from 12.99 to $14.99.

This shows Amazon thinks it still has a good deal of pricing power. It must believe customer demand for its Prime membership is inelastic, meaning it won’t break down with higher prices. The Q1 results will show whether this is really the case.

Where Analysts Stand on Amazon

As it stands, analysts surveyed by Refinitiv (Yahoo! Finance) expect to see revenue rise to $116.3 billion, up 11.3% from $104.46 billion last year in Q1. This works out to earnings per share (EPS) of $8.13, down 48.5% from $15.79 per diluted share last year in Q1.

Analysts have dramatically lowered their estimates for Q1 over the last 90 days, according to Yahoo! Finance. For example, three months ago they were projecting EPS of $10.43. In fact, even seven days ago, analysts were at $8.48 per share.

Therefore, the Netflix effect is already incorporated into earnings estimates. AMZN stock now reflects a lot of the bad news from the debacle.

Nevertheless, analysts still project $47.99 per share in EPS this year, versus $64.81 in 2021. That reflects a drop of about 30% from a year ago. This is not as bad as the 48.5% expected here for Q1, implying an improvement over the next three quarters.

If Amazon reports a less-than-spectacular drop like Netflix did in its Prime memberships, even with higher prices, AMZN stock could rise. This is because it already reflects a lot of bad news in terms of Prime membership cancellations.

What AMZN Stock Could Be Worth

Right now, Refinitiv’s survey of 55 analysts shows the average price target is $4,043.35. This implies a 38.4% potential gain in AMZN stock over the next 12 months. Similarly, TipRanks reports 37 analysts who have written on the stock in the last three months have an average price target of $4,100.26. This represents a 40.35% potential upside in the stock.

Last quarter, the company reported its free cash flow (FCF) for the last 12 months was negative. Amazon continues to “invest heavily” in TV and movies. For example, it just bought a major studio for $8.5 billion.

Its investments in Prime entertainment are costing much more, as it has to compete with more streaming companies. On the other hand, its ad sales are growing quickly and are very FCF positive, producing $18.55 billion in free cash flow. That works out to an FCF margin of 24.6%. This will help bring Amazon FCF positive as well.

The bottom line is AMZN stock already reflects a lot of bad news. Analysts still believe it could be worth up to 40% more at $4,100 per share.

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