Amazon.com Inc. (AMZN) produced huge free cash flow (FCF) results in its Q4 earnings release on Thursday, Feb. 1, 2024. Its FCF powered 72% higher over the prior quarter on a last 12 basis. Moreover, its FCF margins were 68% higher. 

This could make AMZN stock worth at least 53% more to $262.82 in the next year. That is even after AMZN was up 7.87% to $171.82 on Friday, Feb. 2.

Free Cash Flow Results

Free cash flow is the single most important measure of a company's ability to generate cash after all its cash requirements. It includes all cash expenses, plus all its capex requirements, and even working capital needs.

That is why Amazon's return to massive FCF is so important. In its latest quarter, the company generated $36.8 billion in FCF over the last 12 months (LTM). 

That was 72% higher than the $21.4 billion in LTM FCF it made last quarter. I discussed this in my prior Barchart article, “Amazon.com Stock Looks Undervalued to Investors Given Its Positive FCF.”

Moreover, Amazon's free cash flow margins were up 68%. For example, last quarter its LTM FCF margin was 3.8% of the $554 billion in LTM sales ending Sept. 30. But this quarter that FCF margin rose to 6.40%.

That can be seen by dividing the $36.8 billion in FCF it made over the last year by $574.8 billion in sales it made in 2023. In other words, even though LTM sales rose by 3.75% (i.e., $574.8b/$574b), its FCF margins exploded by 68%.

That is a sign of huge operating leverage and foreshadows even higher FCF in the future.

Target Price Based on FCF Margins

For example, analysts now project that sales in 2024 will rise to almost $641 billion, according to Seeking Alpha. That is up 11.5% over 2023. What's more, they project sales could reach $713.25 billion by the end of 2025.

If we apply a 6.4% FCF margin to the $641 billion sales estimate, we get a forecast of $41 billion in FCF for 2024. That is 11.4% over the 2023 figure of $36.8 billion. And for 2025, it could imply $45.6 billion in FCF.

The market will likely push AMZN stock much higher as a result. For example, using a 1.5% FCF yield metric (which is the same as multiplying FCF by 66.7x), results in a market cap forecast of $2,733 billion (i.e., $41b/0.015 = $2,733b).

That is almost $1 trillion higher than its present market cap of $1,785 billion. In other words, AMZN stock could rise another 53% (i.e., $2733b/$1,785 billion).

In other words, AMZN stock could be worth $262.88 per share (i.e., 1.53 x $171.82 per share today).

So, just because the stock is up today on its latest results, shareholders have reason to believe AMZN stock could rise much more. This is also good news for those who short puts.

Shorting OTM Puts for Income

I discussed shorting the $148 strike price put options expiring Feb. 16, 2024, in my last article. These out-of-the-money (OTM) puts were at $3.05 on Jan. 23, with just 24 days until expiration and the strike price was 4.2% below the stock price at the time ($154.28). In other words, you could make an immediate yield of 2.06% (i.e., $3.05/$148.00).

Today, those puts are almost worthless. In other words, this was a very successful income play, especially for existing shareholders. Some might want to roll this trade over to a higher strike price. That involves doing a “Sell to Close" order and then putting in a new trade to “But to Open.”

For example, the $165 puts trading in the Feb. 23 expiration period trade for $1.26. That strike price is about 4% below the closing price on Feb. 2 ($171.82). 

So, for existing shareholders, it makes sense to sell these puts short. They can make an additional 0.7636% in income over the next 3 weeks, (i.e., $126 for the $16,500 invested in the trade). For example, if repeated every 3 weeks for the next 12 weeks, it results in an income of 3.05% based on $504 for the $16,500 secured to do this short play 4 times.

The bottom line is that shareholders can expect to see AMZN stock rise. In the meantime, they can generate extra income by shorting out-of-the-money (OTM) puts.

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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.