Amazon.com Inc. (AMZN) generated positive free cash flow at a lower margin last quarter. However, analysts project higher sales, which could push its value higher. AMZN stock has been rising, so investors might be looking for a dip to buy in. 

One way to set a price target is to sell short out-of-the-money (OTM) put options in nearby expiry periods. That way, an investor can get paid while waiting for as lower buy-in price. This article will show how to do this.

AMZN is at $206.39 in midday trading on Monday, June 2. This is well off its lows from late April, but still below peaks in February.

Projecting Free Cash Flow from Last Quarter's Results

In my last article on May 5 ("Amazon's Free Cash Flow Tumbles, So Is AMZN Worth Buying Here?"), I discussed the company's lower free cash flow and FCF margins.

Here is a recap. Look at the table below, taken from its May 1 Q1 earnings release. Note that the results are from a trailing 12 months (TTM) perspective.

It shows that although  TTM has been rising, FCF margins fell more than its Operating Cash Flow (OCF) margins fell. The OCF fell from 18.2% to 17.5%, but the FCF margin fell from 6% to 4%. 

This is because the capex spending rose dramatically, $78 billion to $88 billion on a TTM basis. As a percent of sales, it rose from 12% to 13.5%. As a result, FCF margins fell.

But this may not always last. Moreover, over the next year, analysts project higher sales. As a result, if OCF margins stay at 18% and capex spending stabilizes at 13%, its FCF margin could average 5% (i.e., 18% - 13% = 5% of sales).

So, let's apply that to analysts' sales forecasts. For example, for the year ending Dec. 2025, Seeking Alpha reports that the average of 60 analysts is $694.9 billion. Note that's 7% higher than the TTM figure above of $650.3 billion in Q1. 

And for 2026, analysts project $762.28 billion (i.e., +17.2% higher than its TTM figure). So, on average, the next 12 months (NTM) run rate revenue forecast is $728.6 billion.

So, let's apply a 5.0% FCF margin, to get a FCF forecast over the next 12 months:

   $728.6b x 0.05 = $36.43 billion NTM FCF

That is $10 billion higher than the $26 billion it made over the trailing 12 months (see table above), or +40.5% higher:

   $36.43b NTM FCF / $25.925b TTM FCF-1 = 1.405 - 1 = +40.5%

This implies the value of AMZN stock could be much higher. 

Target Prices for AMZN Stock

One way to value AMZN stock is to assume that 100% of its FCF will eventually be paid out as a dividend. What will the dividend yield be?

Well, its market cap today is $2.18 trillion, according to Yahoo! Finance. So, using its TTM $26 billion, the yield would be 1.19%:

  $25.925b TTM FCF / $2,180b mkt cap = 0.0119

Applying this to our NTM FCF forecast, and just to be conservative, let's use a higher FCF yield metric, say 1.25%:

  $36.43b NTM FCF / 0.0125 = $2,919.4 billion = $2.19 trillion

That is 33.7% higher than today's market cap:

  $2,919.4 b / $2,180b -1 = 1.3368-1 = +33.7%

That implies AMZN stock is worth 34% more: 

  $205.59 price today x 1.337 = $275 p/sh

Analysts tend to agree. For example, Yahoo! Finance shows that the average of 70 analysts is $238.96 per share. Similarly, Barchart's survey shows a mean price target of $240.69.

In addition, AnaChart, which tracks the performance of analysts' recommendations, shows that 51 analysts now have a price target of $243.90. That is up from $228.16 as I reported in my May 5 Barchart article.

In other words, analysts now see what I see - that its FCF could push AMZN stock higher.

One way to play this is to sell short out-of-the-money (OTM) puts in nearby expiry periods.

Shorting OTM Puts

For example, the $200 strike price put options contracts that expire one month out (July 3) have a $3.97 midpoint premium. That strike price is 3% lower than today's price.

The point is that an investor who enters an order to “Sell to Open” 1 put contract can make an immediate yield of almost 2% (i.e., $3.97/$200 = 0.01985 = 1.985%).

This means that an investor must secure $20k as collateral to buy 100 shares with their brokerage firm. But the investor immediately collects $397. As long as AMZN stays over $200 on or before July 3, the account will not be assigned to buy 100 shares at $200 (i.e., $20,000).

But even if this happens, the investor's account has a lower breakeven point:

  $200 - $3.97 received = $196.03, or -4.65% below today's price of $206.39.

The bottom line is that AMZN stock looks cheap here, and one way to play it is to sell short OTM puts. That way, an investor can set a lower buy-in target price. In addition, the investor can use this short-put income to buy in-the-money call options in much longer-dated periods.

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.