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Amazon (AMZN) said its Q3 sales rose 11% net of currency changes, but its free cash flow was up 170% from the prior quarter. Moreover, its FCF margin spiked. That implies AMZN stock could rise further.
As of Nov. 7, AMZN stock is at $142.81 per share, which is near its highs over the last year. This article will explore why AMZN could rise even further based on its free cash flow growth.
Free Cash Flow is Accelerating
On Oct. 26, Amazon reported that its free cash flow (FCF) over the last 12 months (LTM) was positive $21.4 billion. That was significantly higher than the $7.9 billion FCF Amazon generated in the LTM period ending Q2.
This means that the company's FCF margin soared. For example, in Q3 LTM sales were $554 billion, so its FCF margin over the past year was 3.86% (i.e., $21.4b/$554b). That is significantly higher than the 1.47% FCF margin last quarter based on its $538 billion in LTM sales.
Much of this increase came from three major areas: 3rd party sales (up 18% YoY), AWS (up 25% YoY), and advertising (up 13% YoY).
These results were higher than the YoY gains last quarter, as I mentioned in my previous Barchart article, “Amazon Stock Soars as It Returns to Positive Free Cash Flow, But It's Still Cheap.” For example, AWS sales were up just 12% in Q2, and this quarter were up 13%.
The bottom line is that FCF is accelerating, as well as FCF margins. That could lead to a higher stock price over the next year.
AMZN Stock Could Rise Based on Higher FCF Margins
Analysts project that sales next year could rise from $570.4 billion to $635.3 billion, or up 11% YoY. On average over the next 12 months that means sales could be about $603 billion.
Therefore, if we assume that AMZN could average a 4.0% FCF margin over the next year, free cash flow could rise to $24.1 billion. This is up 12.6% from the $21.4 billion it made in the lat year, as mentioned above.
Moreover, by the end of 2024, FCF could rise to $25.4 billion, using the same 4.0% FCF margin estimate.
That means that AMZN stock could be worth significantly more. For example, right now Amazon's FCF yield is 1.5%. This can be seen by dividing its FCF of $21.4 billion by its $1.43 trillion market cap.
So, if we divide our estimate of $25.4 billion in FCF for 2024 by 1.5%, the market cap could become $1.693 trillion. That implies that it will rise by 13.4% over the next year.
In other words, AMZN stock could be worth 13.4% more at $161.95 sometime in the next year.
Analysts Have Higher Target Prices
A survey of 47 analysts reported by Yahoo! Finance on AMZN stock shows that the average price target is $160.61 per share. That is close to our price target of $161.95 based on its growing FCF and FCF margins.
Moreover, a new service called Anachart, which surveys individual sell-side analysts, reports that the average estimate has an upside of $25.87 and the average time ratio for these targets to be met is 163 days (FYI writer disclosure: the author has been paid by Anachart for consulting work).
The bottom line is that analysts are reasonably confident that AMZN stock has further to go. This article shows that this is supported by its powerful 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.
