Amazon (NASDAQ:AMZN) is once again demonstrating robust free cash flow based on its latest quarterly results. Considering 2024 revenue estimates and a conservative 4% free cash flow (FCF) margin, analysts suggest that AMZN could experience a 23% surge to $181.52 per share.
One strategic approach to capitalize on this potential is by engaging in short-selling near-term out-of-the-money (OTM) put options. This allows existing shareholders to generate income, a notable move considering Amazon’s current lack of dividend payments to its shareholders and the absence of share buybacks.
The anticipation of increased free cash flow is a key driver of this analysis. Assuming a 4% FCF margin based on the next 12-month sales (NTM), analysts estimate a forward-looking free cash flow of $25.4 billion (0.04 x $635.7 billion), given the forecasted sales for 2024.
By employing a 1.5% FCF yield metric, Amazon’s theoretical value would be $1,693 billion ($25.4 billion/0.015), reflecting the existing FCF yield. However, with the potential elevation of FCF levels, the market might adjust its valuation metric. Using a 1.25% FCF yield, the estimated value could be $2,032 billion ($25.4 billion/0.0125). Given Amazon’s current $1,510 billion market cap, this analysis suggests a potential rise between 12.1% and 34.6%, averaging a 23% upside.
Consequently, the projected value for AMZN stock could be $181.52 per share, a 23% increase from its current price of $147.58.
To leverage this potential, investors are advised to sell short near-term expiration put options, thereby generating income while waiting for the stock to rise. Unlike covered call plays, this strategy does not pose the risk of shares being sold.
For instance, examining the December 15 option expiration period reveals that the $140 strike price, which is 4.57% below the current price and OTM, trades for 85 cents per contract. This translates to an immediate income of 0.607% for the short-seller ($0.85/$140). If repeated every three weeks for a year, the expected return could reach 10.3%.
For investors willing to take on slightly more risk, shorting the $142 puts could provide an income of $1.25 per contract, yielding 0.88% immediately ($0.88/$142). However, in the event of a drop to $142, the investor’s cash security of $14,200 per contract shorted would be used to purchase 100 shares at $142.
In summary, Amazon shareholders have multiple avenues to profitably wait for the anticipated rise in AMZN stock, given the company’s substantial free cash flow.
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Author Faith Yakubu 
