Amazon Inc. (NASDAQ:AMZN) has demonstrated robust free cash flow (FCF) margins in its latest quarter, suggesting a potential undervaluation of its stock by as much as 18% to 58%. For existing shareholders, holding onto their positions and engaging in short-selling out-of-the-money (OTM) puts can provide an opportunity for additional income.
As of March 8, AMZN stock is trading slightly higher at $178.49, but its potential value could be considerably higher. Thus, executing a short-put trade seems sensible. However, let’s review our price targets for AMZN stock.
AMZN Stock Price Targets
The recent data on Amazon’s Q4 free cash flow revealed a margin of 6.40% of sales, one of its highest in the past year. By extrapolating this data, analysts estimate that if sales in 2024 reach $641.5 billion, with an FCF margin of 6.40%, the FCF would rise to $41 billion, indicating a potential gain of 11.4% from 2023.
Furthermore, sales estimates for 2025 suggest a rise to $715 billion, leading to an FCF run rate of $43.4 billion. Using a 1.5% FCF yield, Amazon’s potential valuation in the next 12 months (NTM) could reach $2.893 trillion, representing a 57% increase over the current market cap. Using a more conservative 2.0% FCF yield, the potential valuation in NTM would be $2.17 trillion, indicating a 17.8% upside.
Considering these factors, it appears that AMZN stock could range between $210 per share (up 17.8%) and $281.65 per share (up 57.8%). Hence, it makes sense for shareholders to retain their positions and generate extra income by shorting OTM put options in nearby expiry periods.
Shorting OTM Puts for Income
For instance, examining the March 28 expiration period, the $165 strike price put, which is 6.40% below the current spot price, trades for 57 cents. By securing $16,500 in cash and/or margin with their brokerage firm, investors can “Sell to Open” 1 put contract at $165 for March 28 expiration and immediately receive $57. This investment yields 0.345%.
If AMZN stock stays above $165 per share until March 28, the investor isn’t required to use the secured $16,500 to purchase 100 shares at $165. Additionally, investors can repeat this trade four times for the next quarter, with a total expected return of $228, representing a return of 1.38% over the next 90 days.
Investors open to higher assignment risk may opt to short the $170 strike price, offering a payout of $1.23 per contract and a yield of 0.72%. Over 90 days, this can result in a total expected return of $492 or an ER of 3%.
In conclusion, investors in AMZN stock can have confidence in its potential valuation based on its robust free cash flow. Engaging in short-selling OTM puts can provide an avenue for additional income or a means to acquire the stock at a lower cost.
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