why did Amazon (AMZN) just issue $3 billion in bonds?

I’ve known about AMZN since its inception.  I’ve never owned the stock, however–which has, since 2006, been an embarrassing oversight on my part.  But as one of my former bosses used to say, in her characteristically non-PC way, “You can’t kiss all the pretty girls.”

AMZN is clearly a pivotal company in the transformation of US–and ultimately global–retailing.  But at its typical 100 times earnings or so, I’ve always found the valuation a bit too steep.  I am an Amazon customer, though, and an Amazon Prime subscriber.  I also use a Kindle (and an iPad) to read.

Anyway, several things about this week’s issue of $3 billion in AMZN bonds caught my eye:
–the interest rate, which is at only about a 60 basis point premium to Treasuries

–the stated purpose of the issue, namely the boilerplate “general corporate purposes”

–the lack of relevant commentary, although I really shouldn’t be surprised.  I’ve read some suggestion that part of the net proceeds will go to pay for the company’s new $1.16 billion HQ in Seattle.  AMZN does mention in a supplement to the original prospectus that it has agreed to buy the complex.  But it would be weird for the company to disclose that and not mention the buildings as a use of proceeds if that were so.  My assumption is that the new HQ will be financed separately with non-recourse debt.

looking at AMZN financials

–capital spending is up very sharply recently, from around $200 million a year in 2007 to $1.8 billion in 2011 and the current $23 billion annual rate (I’m taking all figures in this post from the Value Line Investment Survey, the industry bible for such data). That’s slightly more than the cash generated by operations, not counting working capital changes (see the second item below this one).

–operating margins are down.  They were more than 6% of sales a half-decade ago.  They’re under 4% currently.  I interpret this is the effect of selling e-books and kindles for little or no profit, or at a loss.

I don’t think this is necessarily bad.  I point it out only as further evidence of the dedication to expanding its digital footprint–even at the expense of profits–that has marked the company for the past few years.

–$5.2 billion in cash?…yes, and no.  The September balance sheet for AMZN shows that figure.  But look at Payables (the amount AMZN owes suppliers) and Receivables (the amount customers owe AMZN).  They’re $8.4 billion and $2.4 billion, respectively.  The difference is $6.0 billion.  In other words, all the cash on the balance sheet (plus another $800 million) is explained by the fact that customers pay AMZN very quickly and suppliers don’t get their cash very fast.

There’s nothing wrong with running a negative working capital business.  In fact, it’s great.  But the cash it generates is only there as long as sales are stable or rising.  If they start to shrink, so too does the cash level.  So spending this money on capital projects, where AMZN can’t get to it quickly, has some risk attached to it.

why the offering?

I think it signals AMZN’s belief that the current environment of intense competition for digital dollars, of low margins and of capital spending larger than cash flow isn’t going to change any time soon.

I wonder whether Wall Street realizes this.  I also wonder how many remember the long struggle toward profitability AMZN had up until 2002.  The average analyst earnings estimate for AMZN in 2013 is $1.80 per share, with one analyst projecting close to $4.  I haven’t done any numbers, but, to me, the just-completely bond sale implies even the $1.80 is probably much too aggressive.