Questions:

• Is it fair to consider short-term cash available because of delayed payment terms of their A/Ps as Free Cash Flow?  Most of their “FCF” from 2007 vanished in the March 2008 Quarter.
• How much does the "FCF" from the increase in Accounts Payable benefit Amazon (AMZN), aside from investment income earned on the float?  
• What is the quality of Amazon's FCF?
• Does this “FCF” deserve a 20 times the amount,  Market Valuation as some analysts are declaring?

It seems that some analyzing Amazon are ignoring Net Income and using FCF to justify its valuation or a target price. There is no clear consensus on the definition of FCF; this can lead to confusion on what is the most meaningful definition and for  the formula to use for its computation..  

Free Cash Flow, strictly speaking, is the amount of money left over from the operations of a company that is available for distribution to the owners of the capital employed in the company.

There are various formulas to compute FCF, whatever method is used; adjustment can be made to get a quality figure. In evaluating a company, analysts use various definitions of FCF, including "True Free Cash Flow", "Structural Free Cash Flow", "Maintenance Structural Free Cash", etc.

Below are two methods to compute Amazon's FCF.  Formula 1 is very popular with analysts and liked by the company.  It includes, in FCF, Short Term Cash received from customer sales in one quarter that was paid to suppliers in the following quarter. The second  Formula is based on earnings, and ignores that Short Term Cash.  Also listed is FCF, based on Formula  1 for the Quarter ended March 31, 2008, showing FCF  at a negative $(706)ml.

Two formulas for computing Amazon's FCF for 2007

1) Cash Flow From Operations...........$1.405 bn.

• Less Capital Expenditure.................224
• Free Cash Flow......................................$1.181bn

2) Net Income............................................$476ml

• Plus Depreciation...............................246
• Less Capital Expenditures................-224
• Free Cash Flow.........................................$496 ml

Difference between the formulas .....................................$685 million

Free Cash Flow Quarter ended March 31, 2008 (formula 1)

3) Cash Flow From Operations.....................$(645) ml.

• Less Capital Expenditure...........................-61
• Free Cash Flow(Negative)...............................$(706)ml

Amazon is a company that has been in business for over 14 years and still has an Accumulated Deficit in Retained Earnings of $(1.2) bn, as  total net losses  exceeded their net Income. For 2007, they had earnings of $476ml; at the current stock price of $81 they have a P/E ratio of 68.