Amazon (NASDAQ:AMZN) is once again demonstrating robust free cash flow, as evidenced by its latest quarterly results. With 2024 revenue estimates and a conservative 4% free cash flow (FCF) margin, there’s a potential 23% increase, projecting a per-share value of $181.52 using a cautious FCF yield metric.

To capitalize on this potential, one strategic approach is to engage in selling short near-term out-of-the-money (OTM) put options. This strategy enables existing shareholders to generate income, particularly noteworthy since Amazon does not currently offer dividends to its shareholders, despite positive FCF generation and a lack of share buybacks.

Amazon’s Projected Free Cash Flow Increase

Amazon generated $21.4 billion in FCF over the last 12 months (LTM), representing 3.8% of its LTM revenue of $554 billion.

Assuming a 4% FCF margin based on its next 12-month sales (NTM), analysts forecast $635.7 billion in sales for 2024. This implies a potential NTM FCF of $25.4 billion (0.04 x $635.7b).

Potential Upside for AMZN Stock

With this projected increase in FCF, the potential value of AMZN stock could rise. Using a 1.5% FCF yield metric, the stock could be valued at $1,693 billion (i.e., $25.4b/0.015), reflecting the current FCF yield. However, with higher FCF levels, the market might adjust its valuation metric. Employing a 1.25% FCF yield, the stock could be valued at $2,032 billion (i.e., $25.4b/0.0125).

Considering Amazon’s current market cap of $1,510 billion, this suggests a potential increase ranging from 12.1% to 34.6%, averaging to a substantial 23% upside.

Strategy: Selling Short Near-Term OTM Puts

To leverage this potential, one strategic move is selling short near-term OTM put options to generate income, providing an avenue for shareholders to be compensated while awaiting stock appreciation. Unlike covered call plays, there’s no risk of shares being sold.

For instance, examining the Dec. 15 option expiration period, the $140 strike price (4.57% below the current price) trades at 85 cents per contract. This yields an immediate income of 0.607% for the short-seller. If repeated every three weeks for a year, the expected return could be 10.3%, given the 17 periods of 3 weeks in a year.

For those willing to take on slightly more risk, shorting the $142 puts provides income of $1.25 per contract, equating to an immediate yield of 0.88%. However, falling to $142 would utilize the investor’s cash security of $14,200 per contract shorted to purchase 100 shares at $142.

In summary, Amazon shareholders have multiple avenues to profitably await the anticipated rise in AMZN stock, buoyed by its substantial free cash flow.

Featured Image: Unsplash @ Christian Wiediger

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