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AMZN stock could rebound 20% a year based on FCF analyst forecast


Amazon (NASDAQ:AMZN) the stock has been in free fall for several months. I suspect it may be at a point where investors can start hoarding it. One reason is that I expect AMZN stock to rebound this quarter or into the spring.

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After peaking at $3,696.06 on November 18, the stock has fallen. At the end of December, AMZN stock closed at $3,334.34. But as of January 13, it was lower at $3,224.28. That’s down about 10% from its peak and down 3.3% since the start of 2022.

However, once the company releases its next results, I suspect AMZN stock could rebound. Let’s look at this further.

How things stand on Amazon.com

Amazon is expected to release its fourth quarter (Q4) earnings report before the end of this month. Indeed, it generally publishes its quarterly results at the end of the month following the end of the quarter.

More importantly, the release should show a much higher free cash flow (FCF) figure than last quarter. In the third quarter, Amazon announced that its FCF for the last 12 months (LTM) had fallen to just $2.6 billion. This figure was significantly lower than its LTM figure for the third quarter of the previous year of $29.5 billion.

By the way, Amazon is one of the only big companies to report its earnings this way. He likes to use a quarterly comparison of FCF for the full year looking back over the previous 12 months.

This is likely because the Christmas quarter (Q4) accounts for such a large portion of its overall free cash flow. In other words, quarterly changes are irrelevant unless viewed on an LTM basis because the Christmas quarter is such a big factor.

One-time costs and FCF

As I wrote about last month, Amazon has had a lot of trouble with operating costs. This is likely due to the difficulties of Covid-19 and its effect on Amazon’s business. For example, its transportation and shipping costs increased by 20% on a year-on-year basis (YOY) in the third quarter.

Additionally, shipping costs increased by 30% in Q2 and 57% in Q1. This largely explains why the third quarter trailing 12-month (TTM) free cash flow numbers were significantly lower. However, you can see that the year-over-year cost increases have come down. This could mean that Amazon is adapting to these changes.

Therefore, I suspect that the fourth quarter may not show such a significant increase in these costs. As a result, FCF margins could be better than expected, given the weak Q3 results.

Free Cash Flow Estimates for AMZN Stocks

Historically, Amazon has achieved TTM FCF margins of 8.5% or more. Last year, Amazon made $29.5 billion in TTM FCF on sales of $348 billion. That is an LTM FCF margin of 8.5%.

So, Amazon might be at the bottom here in terms of low LTM FCF margins. Going forward, FCF margins could be at least 4.25%, half of historical quarterly averages.

Therefore, assuming sales reach $553 billion in 2022, using Seeking Alpha analyst estimates, FCF’s forecast for 2022 will be $23.5 billion. This is the result of multiplying 4.25% by $553 billion.

That’s almost 10 times the $2.5 billion Amazon earned in LTM FCF during the third quarter. So, this represents a huge turnaround in the CWF. And remember, we’re only using half the normal margin of 8.5% FCF for Amazon.

Where That Leaves AMZN Stock

Using a return metric of 1% FCF, we can predict Amazon’s market value to reach $2.35 trillion. This is the result of dividing $23.5 billion by 0.01 (i.e. $23.5 billion / 1.0% = $2.35 trillion).

This target market value of $2.35 trillion is 43.73% higher than Amazon’s existing market value of $1.635 trillion.

This implies that AMZN stock is worth 43.73% more than its current price of $3,224.28. This puts its target value at $4,634.26 per share.

Here’s the good thing about it. Even if it takes 2 years for the stock to rise 43.73% at this price, the average annual return will be around 20% per year (19.9%).

So, investing in AMZN stocks should provide an average return of at least 20% over the next 2 years, and possibly much more. This is a very good return on investment for most investors, especially in the long term.

As of the date of publication, Mark R. Hake did not hold any position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and run the Total Value of Return Guide that you can consult here.


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