• As of May 24, Amazon (AMZN) is down 37.4% year-to-date from $3,334 where it ended 2021.
• Since it released its first-quarter results on Apr. 28, the stock is down 27.8%. This shows that the stock is in a freefall, especially since it is now burning through large amounts of cash.
• Investors should stay clear of AMZN stock, at least until it can start producing positive free cash flow.

The online merchant Amazon (NASDAQ:AMZN) has had a massive outflow of free cash flow (FCF) in the last 12 months. This does not bode well for AMZN stock going forward. FCF decreased to an outflow of $18.6 billion for the trailing twelve months. This compares with negative $26.4 billion for the trailing twelve months ended March 31, 2021.

The stock is going to have a hard time rising when cash is bleeding. It’s not like the company is reinvesting profits. Its net income is negative and the resulting FCF is even more negative after capex spending.

For example, in the first quarter (Q1), the company produced a net loss of $3.8 billion. As a result, its cash flow from operations was negative $2.79 billion.

Next, after deducting $14.951 billion in capex spending, its free cash flow (FCF) ended up being negative $17.741 billion for Q1. If this keeps up during Q2, don’t expect to see AMZN move higher. By contrast, it will tank further.

Where This Leaves Amazon

As a result, AMZN stock is down 28.59% from its prior peak of $2,903 to just $2,072.98 as of May 24. If Amazon keeps burning through cash like this, AMZN stock will crater even further. The reason is very simple — the market hates stocks with massive cash burn rates.

The cause of this outflow was not revenue growth. Sales were up 7% in Q1 to $116.4 billion, compared with $108.5 billion in the prior year. This was near the high end of its prior guidance for 3% to 8% growth last quarter. Additionally, Amazon now forecasts that its Q2 sales will grow at a similar rate of 3% to 7% compared with Q2 2021.

On the conference call, the chief executive officer 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. And those were already much higher due to COVID-19 issues.

Prospects For AMZN Stock

AMZN stock is down 27.8% from its price prior to the earnings release. The stock could keep dropping, especially if Q2 FCF turns just as negative as in Q1.

As a result, analysts are lowering their price targets. For example, 53 analysts had an average price target of $4,055.57 on Apr. 25 prior to the earnings release. Now, the average target is down to $3,643.

The price target seems to be falling each day. Since the earnings release, most analysts that have issued reports have issued “maintain” recommendations.

Inflation is eroding Amazon’s cash-generating base. Analysts may keep lowering their price targets without drastic action by Amazon to address this issue. The bottom line here is to stay away from AMZN stock until it is clear Amazon can produce positive free cash flow.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.