Powerful Free Cash Flow Could Push Amazon Over $4,000 Per Share

Amazon (NASDAQ:AMZN) reported its earnings and most importantly its free cash flow (FCF) results for the second quarter on Jul. 29. Although revenue was higher, its FCF was lower than a year earlier as well as lower from Q1. But FCF was still positive. As a result, we can estimate where AMZN stock will be a year from now.

In the past year, AMZN stock has basically been flat. It closed at $3,499 on Sept. 1, 2020 and on Sept. 1 this year, it closed at $3,479. What’s more, AMZN stock is up 7.5% year-to-date (YTD), starting from around $3,256 at the end of December 2020.

However, I estimate that — based on Amazon’s FCF margin estimates — the stock could rise to over $4,000 per share. Here’s why.

AMZN Stock and Free Cash Flow

One of the most unique things about Amazon and AMZN stock is that it focuses almost exclusively on its FCF performance. For example, the company presents several ways of looking at its free cash flow results. That said, I am old-fashioned and like to look at the strict definition of FCF — cash flow from operations minus capex (capital expenditure) spending.

Amazon reported that its trailing-12 month (TTM) FCF was $12.1 billion. Now, this was lower than its year-ago FCF of $31.9 billion. In fact, during Q1, the company’s FCF was a much higher $26.4 billion.

But, let’s be thankful. At least the recent Q2 FCF was still positive. Moreover, Amazon had TTM sales of $443.3 billion, according to Seeking Alpha. Therefore, its TTM FCF margin was 2.73%. In the prior quarter, $26.4 billion of FCF was 6.3% of its $419.13 billion in sales. As a result, Amazon’s average FCF margin over the last two quarters is 4.5%.

We can use this to estimate the company’s FCF next year. Analysts surveyed by Seeking Alpha estimate sales of $562.44 billion. Applying the 4.5% FCF margin to this sales estimate makes $25.3 billion in FCF for 2022.

What Amazon Stock Is Worth

Right now, AMZN stock has an FCF yield of less than 1%. This can be seen by dividing its TTM FCF of $12.1 billion by its recent market value of $1.76 trillion.

However, to be conservative, we can use a 1% FCF yield to estimate its value by next year. For example, dividing the 2022 FCF estimate of $25.3 billion by 1% results in an FCF estimate of $2.53 trillion. That represents a potential gain of 43.75% for AMZN stock over the next year.

But not so fast. We also need to be realistic here. For example, let’s use the same method to value Amazon based solely on its 2.73% FCF margin for Q2. The result is an FCF estimate of $15.35 billion (i.e., 0.0273 x $562.44 billion in 2022 sales). Using the 1% FCF yield metric implies that Amazon’s market cap is worth $1.535 trillion. This means that AMZN could fall 12.78% from its recent market value of $1.76 trillion.

So, let’s average the two target values. The average of $2.53 trillion and $1.535 trillion is $2.03 trillion. That represents a potential gain of 15.34% over Amazon’s present value. This means that AMZN stock is worth about $4,012 per share (i.e., 1.1534 x the Sept. 1 close of $3,479).

What to Do with AMZN Stock

Amazon has a very powerful business model and it knows it. That is why the company talks so much about its free cash flow in each earnings release. In fact, the company puts its “Statement of Cash Flows” ahead of the balance sheet and net income statement.

Moreover, the free cash flow that Amazon produces is mostly plowed back into either debt reduction, acquisitions or cash pile-up. In fact, Amazon now has over $40 billion in cash sitting on its balance sheet.

However, one thing that Amazon definitely does not do is share buybacks. Most of its free cash flow is used to pay down its debt and build cash reserves. That does not really help shareholders. I suspect that, if Amazon were to start a buyback program, AMZN stock would likely not be flat over the past year.

Nevertheless, based on its FCF margins, my best estimate is that AMZN stock will rise over 15% to $4,012. Based on this, investors might want to start accumulating shares, assuming it will rise over the next year.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in any of the securities mentioned in this 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.