Amazon's Operating Cash Flow Could Push AMZN Over $314 - What's the Best AMZN Play?

Amazon, Inc. (AMZN) strong revenue and operating cash flow forecasts could push AMZN above $314, up 22%. Two plays are to short out-of-the-money (OTM) puts or, for investors with limited capital, a vertical bull put credit spread. This article will describe AMZN's valuation and these two plays.

AMZN closed at $256.78 on Friday, Sept. 11, but it's been essentially trading flat since right after its earnings release on July 30. For example, on July 31, AMZN closed at $271.58, 5.8% above today's price.

Investors have likely been concerned about Amazon's negative free cash flow (FCF) for the last 2 quarters due to heavy capex. However, investors should assume the rising capex eventually pays off.

As a result, a better way to value AMZN is to use its trailing operating cash flow (OCF) (i.e., before capex is deducted from cash flow) and OCF margins, which have been rising.

Then, after applying its average OCF margin to analysts' revenue forecasts and using a conservative multiple, AMZN stock is worth 17% more.

For example, last quarter Amazon reported its trailing 12-month (TTM) OCF and TTM sales, so we can calculate its TTM margins over the last 6 quarters:

Not only has its OCF growth outpaced revenue growth, but its OCF margins have risen as a result. We can assume that over the next 12 months (NTM), its average OCF margin will likely be about 21%.

So, applying this to analysts' revenue forecasts over the next two calendar years:

2026: $828.28b revenue (Seeking Alpha) x 0.21 = $173.94b OCF

2027: $946.70b revenue (Seeking Alpha) x 0.21 = $198.81b OCF

Average: $887.5b x 0.21 = $186.375b OCF over the next 12 months (NTM)

This is 15.4% above its Q2 TTM OCF of $161.4 billion, as seen above in the Amazon table.

As a result, it implies a higher valuation for AMZN stock over the next 12 months (NTM).

For example, let's assume the market values AMZN stock with a 5.5% yield on the OCF forecasts. (Right now, its TTM OCF yield is 5.83%, but with a higher OCF margin and higher OCF, the yield will likely improve.) That is the same as multiplying OCF by 18.2x (i.e., 1/0.055 = 18.18):