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Amazon Inc. (AMZN) reported strong Q3 operating cash flow and margins. Despite higher capex spending, its free cash flow (FCF) also remained strong. This could make AMZN stock attractive to value investors.
AMZN is up over 6.5% in midday trading at $198.06 per share, up 23% from a low of $161.93 on Aug. 6. However, based on yesterday's results, it's possible the stock could be worth much more.
Strong Cash Flow Results and Outlook
Amazon reported 11% higher Q3 sales year-over-year (YoY) and 55% higher YoY quarterly operating income. But Amazon is one of the few companies that reports that not only reports its operating and free cash flow (FCF), but also reports it for the trailing 12 months (TTM). That way you can determine how well its cash flow performed over the past year every quarter, eliminating seasonal effects.
For example, Amazon reported that its TTM operating cash flow (OCF)rose from $107.95 billion in Q2 to $112.706 billion. That represents a solid 4.4% annual OCF growth over the past quarter.
However, since sales rose slower at just 2.61% (i.e., $620.13b in TTM Q3 sales vs. $604.334b), its TTM OCF margin rose faster than TTM sales growth. This data is available from Seeking Alpha on their “TTM by Quarter Income” page.
For example, the Q3 TTM OCF margin was 18.17% (i.e., $112.7b TTM OCF/$622.13b TTM sales) vs. the Q2 OCF margin of 17.86% (i.e., $107.95b TTM OCF / $604.334b TTM sales). In other words, its OCF margin was accelerated by 1.7% (i.e., 18.17%/17.86%). That shows the company is experiencing operating leverage.
FCF Slightly Lower But Capex Rose Significantly
This led the company to significantly raise its net capex spending which led to slightly lower FCF (note: OCF - Capex = FCF).
For example, its Q3 TTM FCF was $47.75 billion, vs. Q2 TTM FCF of $52.97 billion. That $5.22 billion FCF decline was despite over $10 billion higher capex spending, according to Seeking Alpha over the last year (i.e., $69.75 b capex in Q3 vs. $59.61b in Q2). (On a net basis (as shown above) capex spending over the TTM period was $65 billion in Q3 vs. $55 billion in Q2).)
The bottom line is that free cash flow (FCF) and FCF margins were still strong in Q3. For example, its TTM FCF margin was 7.7% (i.e., $47.75b/$620.13b).
This strong cash flow and capex spending led Amazon to provide a very positive outlook. Ii said its sales could grow between 7% and 11% on a YoY basis.
In addition, it guided that operating income (and likely operating cash flow as well) could rise from $16 billion to $20 billion, up from the Q4 2023 of $13.2 billion. That represents YoY growth in operating income and OCF of between 21.2% and 51.5%.
This could lead to a higher stock price target for the stock. Here's how.
Setting a Price Target for AMZN Stock
Analysts (61) surveyed by Seeking Alpha now project that 2025 sales could 10.4% rise to $705.2 billion. Yahoo! Finance's survey of 58 analysts projects a 10.7% sales gain in 2025 to $703.81 billion. So, the average forecast is $704.5 billion.
Therefore, assuming Amazon makes an 18.2% OCF margin (the same as its TTM Q3 margin - see above), its operating cash flow is forecast to be $128.2 billion. Moreover, after subtracting $67 billion in net capex spending (slightly higher than the $65 billion spent over the last year), the 2025 FCF would be $61 billion.
That will be a huge increase over the $48 billion it made over the last year in Q3 - i.e., a +27% YoY gain in FCF. Moreover, based on the $704.5 billion in estimated 2025 sales, the FCF margin will be 8.66% (i.e., $61b FCF/$704.5b est. 2025 sales). That is much higher than its Q3 TTM FCF margin of 7.7%.
As a result, Amazon stock could be worth much more. For example, right now its FCF yield is 2.44%. So, if we divide the $61 billion in est. FCF next year by 2.44%, we get a projected market cap of $2.5 trillion (i.e., $61b/0.0244 = $2,500 billion).
That is 20% higher than its market cap today of $2.081 trillion. In other words, AMZN stock is worth 20% more than its price today of $198.06. That sets the price target at $237.67 per share.
Analysts agree that AMZN looks undervalued. Yahoo! Finance reports that the average of 47 analysts is $219.60 per share and Barchart's mean is $226.50. Moreover, AnaChart reports that the average of 37 analysts who've recently written on the stock is $230.35 per share.
The bottom line is that AMZN stock looks cheap here based on its strong operating and free cash flow.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
