Amazon Takes a Hit With Massive Free Cash Flow Losses

Amazon (AMZN) stock has fallen since its April 28 release of results for Q1. It showed that the online merchant produced a massive outflow of free cash flow (FCF) of $18.6 billion in the last 12 months. This does not bode well for AMZN stock going forward.

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

As a result, AMZN stock is down over $415 from its prior peak of $2,903.65 just prior to the release of the results. Unfortunately, if Amazon keeps on burning through cash on a massive scale like this, AMZN will crater even further. The reason is very simple - the market hates stocks that have massive cash burn rates.

The core cause of the decline is not revenue growth, which was up 7% to $116.4 billion in Q1, compared with $108.5 billion in the prior year. This was near the high end of its prior guidance of 3% to 8% growth last quarter (up to $117 billion). The company says it expects Q2 sales to grow just 3% to 7% compared with Q2 2021. 

Amazon reported a net income loss of $3.8 billion in Q1 compared to a gain of $8.1 billion in the prior year-ago period. The company's cash flow outflow seems to be the result of sharply higher costs, due to inflation, shipping, and logistics issues, as well as skyrocketing SG&A costs. 

For example, 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.

Where Things Stand With AMZN Stock

AMZN stock is down 14.3% from its price prior to the earnings release. The problem is that the stock could take another hit if it can't get its costs under control, including the externally driven ones 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. However, since the earnings release, most analysts that have issued reports have issued “Maintain” recommendations.

Inflation is destroying the company's earnings power base. If it does not abate anytime soon, analysts may keep lowering their price targets. This is because ongoing FCF losses stoked by spiraling inflation won't be positive for Amazon's finances on a long-term basis. The bottom line here is to be careful with AMZN stock.