Amazon’s Free Cash Flow Takes a Hit, and AMZN Stock Suffers

Stock Market

Amazon (NASDAQ:AMZN) is down 15% since it released its first-quarter results on April 28. The online merchant had a massive outflow of free cash flow (FCF) in the last 12 months. This does not bode well for AMZN stock going forward.

The reason is its FCF, after including repayments of finance leases and financing obligations, was negative $29.3 billion in the last 12 months (LTM). This means it had a huge cash outflow. That compares to a positive inflow of $14.9 billion in the prior LTM period. This is a $44.2 billion swing in cash burn over two periods.

As a result, AMZN stock is down over $444 from its prior peak of $2,903 to just $2,459 as of May 3. If the company keeps burning through cash like this, AMZN stock will crater even further. The reason is very simple — the market hates stocks with massive cash burn rates.

The cause of this outflow was not revenue growth. Sales were up 7% in Q1 to $116.4 billion, compared with $108.5 billion in the prior year. This was near the high end of its prior guidance (3% to 8% growth last quarter). In addition, Amazon now forecasts Q2 sales will grow at a similar rate of 3% to 7% compared with Q2 2021.

But Amazon had a loss of $3.8 billion in net income in Q1. This compares to a gain of $8.1 billion in the prior year-ago period. This fed into its free cash flow outflow losses. The losses were due to sharply higher costs: inflation in shipping, and logistics, as well as skyrocketing SG&A costs.

On the conference call, the CFO said both external and internally controllable costs have experienced a “sharp increase.” Amazon said its air and ocean shipping rates were at or above the rates in the second half of last year, which were already much higher than pre-COVID levels.

Prospects for AMZN Stock

AMZN stock is down 15% from its price prior to the earnings release. It could drop further if its costs are not under control. This includes the expenses from outside its control like shipping hikes.

As a result, analysts are lowering their price targets. For example, 52 analysts had an average price target of $4,055.57 on April 25 prior to the earnings release. Now the average target is down to $3,728.23.

That represents a decline of 8% in the last week, and the average seems to be falling each day. Since the earnings release, most analysts that have issued reports have issued “Maintain” recommendations.

Inflation is eroding Amazon’s cash-generating base. Analysts may keep lowering their price targets without drastic action by Amazon to address this issue. The bottom line here is to stay away from AMZN stock until it’s clear Amazon can produce positive free cash flow.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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