Amazon shares hit six-month high as investors ignore sharp drop in free cash flow

Amazon Inc reported a trailing 12-month free cash flow of $1.232 billion in the first quarter, marking a stark 95 per cent year-on-year decline from the $25.9 billion generated a year ago. This contraction represents just 0.17 per cent of sales, a figure that stands in sharp contrast to the company's market performance. Despite the deteriorating short-term cash metrics, the share price rose two per cent to close at $268.26, reaching a six-month high.

The primary driver behind this reduction in free cash flow was a 67 per cent surge in capital expenditure, which reached $147.3 billion on a trailing 12-month basis. While operating cash flow grew by 30 per cent year-on-year and sales rose by 14 per cent, the aggressive spending on infrastructure has absorbed the majority of the liquidity. This heavy investment is largely attributed to the expansion of the AWS division and significant outlays for AI-related infrastructure.

Chief Executive Officer Andrew Jassy clarified that the increased spending is a strategic necessity for long-term growth, noting that assets such as data centres have useful lives of 30 years while chips and servers last five to six years. He explained that it typically takes between six and 24 months for new infrastructure to begin billing clients, meaning the full return on this investment is expected over a multi-year horizon rather than immediately.

Analyst projections suggest that this heavy investment will eventually pay off, with free cash flow expected to recover to approximately $14.9 billion by 2027 and $33 billion by 2029. Under these scenarios, revenue is projected to reach $820.4 billion in 2026 and $921.5 billion in 2027, assuming an operating cash flow margin of around 20 per cent.

Despite the current valuation models suggesting the stock may not be significantly undervalued, market sentiment remains optimistic. The average of 64 analysts surveyed by Yahoo Finance set a price target of $304.66, suggesting a potential upside of 13.6 per cent from the recent close. Some valuation models based on discounted future cash flows indicate the current share price may already reflect these future gains.

The market currently values Amazon at a market capitalisation of approximately $2.885 trillion. Investors appear to trust the company's long track record of converting heavy capital investment into substantial free cash flow over time, even as they navigate short-term volatility in cash metrics.