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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.

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AMZN - last 6 months - Barchart - June 2

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.

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Amazon's Q1 operating and free cash flow margins - May 1 earnings release (and Hake analysis)

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%).

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AMZN puts expiring July 3 - Barchart - As of June 2

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.

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