Last Cyber Monday, 26th November 2012, Amazon ("AMZN") launched an astute $3 billion bond offering priced to perfection at spreads of 38 bps, 63 bps and 93 bps over 3, 5 and 10 year UST's respectively. The cash requirement was positioned under the guise of the purchase of its Seattle headquarters and "general corporate purposes". With less than $1.2 billion of the $3 billion going on the property purchase, the reality of the need for funds is a little scarier.
Amazon, which prides itself as "The Everything Store", is the classic example of a retailer overtrading. It trades at razor thin margins and needs revenue growth to provide any meaningful free cash flow for reinvestment in the business over and above depreciation. With growth in revenues becoming more difficult to come by, Amazon is likely to tap the public markets again this Thanksgiving season as it adds to its growing leverage to fuel growth.
Cash Requirements Required For Consensus Growth
Amazon is guiding 2013 revenue of $72-75 billion and analyst revenue consensus is for over $90 billion in 2014. Growth in revenue however is likely to require significant investment in fixed assets. In December 2012, fixed assets totaled just over $7 billion and have increased this year to $10 billion according to Q3 2013 SEC filings. A $3 billion increase in fixed assets was therefore required to generate an increase, in an optimistic scenario, of $14 billion in revenue between 2012 and 2013. Applying the comparable metrics (approx. $5 of revenue for every $1 of fixed asset investment) to 2014 revenue projections, Amazon requires a further $3 billion investment in fixed assets to sustain its growth and, unfortunately, it won't be coming from free cash flow.
Free cash flow over the last 12 months has followed a steep downward curve:
- Q3 2012: $1,058 billion
- Q4 2012: $395 million
- Q1 2013: $177 million
- Q2 2013: $265 million
- Q3 2013: $388 million
Total twelve month free cash flow has therefore totaled just over $1 billion, $2 billion short of the minimum investment required to support 2014 revenue projections.
Can the company tap other sources of cash? Well, as is the case with the majority of retailers, Christmas is their busiest period for sales. The flip side of that is that January through March inevitably requires the company to repay creditors leading to a negative drain on working capital.
As the table below highlights, working capital requirements are eating up any surplus cash flow capacity forcing the company to tap long term debt to cover its fixed asset investments.
Bezos and the team are clearly aware of this situation and benefited in 2012 around the hype of Cyber Monday to launch the last bond offering. Timing ad PR have been some of Bezos' primary strong points coupled with a "do what I say, don't do what I do" attitude illustrated by his current aggressive unloading of his personal stock.
In the same way that subprime borrowers loaded up with credit card debt in 2007, Amazon needs to raise cash before Christmas if it wants to repay its creditors in the new year and have sufficient cash left over to reinvest in the business. If last year is anything to go by, Bezos is likely to tap in to the market at the point of maxim hype this upcoming Cyber Monday.
Equally, just like the subprime lenders of 2007, the institutional investors are likely to Hoover up the bonds without asking any questions. Debt fuelled expansion usually ends badly for everyone, although that is likely to be overlooked today as everyone gets in to the spirits of the holiday season.