Amazon (NASDAQ:AMZN) the shares have been in a kind of free fall for the last few months. I suspect it may be at a point where investors can start accumulating it. One reason is that I anticipate that AMZN shares will stage a return this quarter or spring.
After hitting a high of $ 3,696.06 on Nov. 18, the stock fell. At the end of December, AMZN shares closed at $ 3,334.34. But as of Jan. 13, it was lower at $ 3,224.28. This represents about a 10% drop from the top and a 3.3% drop from the start of 2022.
However, once the company issues its upcoming earnings, I suspect AMZN shares could strengthen. Let’s look at this further.
Where things stand on Amazon.com
Amazon is likely to release its fourth-quarter earnings report (4th quarter) sometime before the end of this month. This is because it usually publishes its quarterly profits at the end of the month following the end of the quarter.
More importantly, the release is likely to show a much higher free cash flow (FCF) than in the last quarter. In the third quarter, Amazon reported that its FCF in the last 12 months (LTM) had fallen to just $ 2.6 billion. That was well below $ 29.5 billion in last year’s LTM quarter.
By the way, Amazon is one of the only large companies to report its earnings in this way. He likes to use a quarterly comparison of year-round funding based on a review for the past 12 months.
This is most likely because the Christmas quarter (Q4) is such a big part of his total free cash flow. In other words, quarterly changes are insignificant unless we look at them on the basis of LTM, because the Christmas quarter is such an important factor.
One-off costs and FCF
As I wrote last month, Amazon had a lot of trouble with operating costs. This is probably due to suffering from Covid-19 and its impact on Amazon’s business. For example, its transport and shipping costs increased by 20% year on year (YY) in the third quarter.
In addition, shipping costs increased by 30% in the second quarter and by 57% in the first quarter. This largely explains why the free cash flow figures were significantly lower in the last quarter by 12 months (TTM). However, you can see that the increase in YOY costs is decreasing. This could mean that Amazon is adapting to these changes.
Therefore, I suspect that the fourth quarter may not show such a large increase in these costs. As a result, FCF margins may have been better than expected given the poor performance in the third quarter.
Free cash flow estimates for AMZN stocks
In the past, Amazon has achieved TTM FCF margins of 8.5% or more. Last year, Amazon generated $ 29.5 billion in TTM FCF with sales of $ 348 billion. This is an 8.5% LTM FCF margin.
So Amazon could be low here given its poor LTM FCF margins. In the future, FCF margins could be at least 4.25%, which is half of historical quarterly averages.
Therefore, assuming sales in 2022 reached $ 553 billion, using I’m looking for Alpha analyst reviews, the FCF forecast for 2022 will be $ 23.5 billion. This is the result of multiplying 4.25% by $ 553 billion.
That’s nearly 10 times the $ 2.5 billion that Amazon earned in the third quarter with the FCF LTM. So it represents a big turnaround in the FCF. And remember, for Amazon, we only use half of the usual 8.5 percent FCF margin.
Where it leaves AMZN stock
Using the 1% FCF yield metric, we can predict that Amazon’s market value will 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 means that AMZN shares are worth 43.73% more than their current price of $ 3,224.28. This means that its target value is $ 4,634.26 per share.
Here’s the good thing about it. Even if it takes 2 years for a share to rise by 43.73% at that price, the average annual return will be about 20% per year (19.9%).
So investing in AMZN shares should provide at least a 20% average return over the next 2 years and maybe much more. This is a very good return on investment for most investors, especially in the long run.
At the date of publication, Mark R. Hake had no position (direct or indirect) in the securities mentioned in this article. The opinions expressed in this article are the opinions of the writer who are the subject InvestorPlace.com Guidelines for publication.