Amazon’s Robust Free Cash Flow Growth Suggests Upside for AMZN Stock

Amazon Stock

Amazon (NASDAQ:AMZN) recently reported an 11% increase in Q3 sales, factoring in currency changes. Notably, the company’s free cash flow (FCF) surged by a remarkable 170% from the previous quarter, accompanied by a significant spike in its FCF margin. This robust FCF performance indicates the potential for AMZN stock to continue rising.

As of November 7th, AMZN stock stands at $142.81 per share, close to its 52-week high. In this article, we will delve into the reasons why AMZN could see further appreciation based on its impressive FCF growth.

Accelerating Free Cash Flow:

On October 26th, Amazon announced that its free cash flow over the last 12 months (LTM) reached a positive $21.4 billion. This marked a substantial increase compared to the $7.9 billion generated in the LTM period ending in Q2. Importantly, this led to a notable expansion in the company’s FCF margin.

For instance, in the LTM for Q3, Amazon’s sales totaled $554 billion, resulting in an FCF margin of approximately 3.86% ($21.4 billion divided by $554 billion). This is significantly higher than the 1.47% FCF margin observed in the previous quarter based on $538 billion in LTM sales.

This remarkable increase in FCF was driven by significant growth in three major areas: 3rd party sales (up 18% YoY), Amazon Web Services (AWS) revenue (up 25% YoY), and advertising (up 13% YoY).

The upshot of these developments is that FCF is accelerating, along with FCF margins, which can potentially contribute to a higher stock price in the coming year.

AMZN Stock’s Potential Based on Improved FCF Margins

Analysts are forecasting that Amazon’s sales for the next year could increase from $570.4 billion to $635.3 billion, representing an 11% YoY growth. Assuming an average sales figure of $603 billion over the next 12 months, an estimated 4.0% FCF margin could lead to a total free cash flow of $24.1 billion. This marks a 12.6% increase from the $21.4 billion generated in the previous year.

Furthermore, by the end of 2024, with the same 4.0% FCF margin estimate, FCF could reach $25.4 billion, signifying an increase in the company’s valuation.

Currently, Amazon’s FCF yield is approximately 1.5%, calculated by dividing its FCF of $21.4 billion by its market capitalization of $1.43 trillion. If we apply this yield to the projected FCF of $25.4 billion for 2024, Amazon’s market capitalization could grow to $1.693 trillion, representing a 13.4% increase within the next year.

In summary, AMZN stock may have the potential to appreciate by 13.4%, reaching $161.95 sometime in the next year, based on the growth of its FCF and FCF margins.

Analysts’ Price Targets

An analysis of 47 analysts’ price targets for AMZN stock, as reported by Yahoo! Finance, shows an average target price of $160.61 per share, closely aligned with our price target of $161.95, considering the robust FCF performance.

Moreover, a service named Anachart, which collects insights from individual sell-side analysts, suggests an average upside of $25.87 with an average time frame of 163 days to achieve these targets.

In conclusion, analysts are reasonably confident that AMZN stock has room for further growth, supported by its strong free cash flow performance.

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