- Company borrows $10 billion in six tranches.
- Coupon rates come in lower than Apple's recent deal.
- Shares top $2,500 for the first time.
When I previously covered internet retail giant Amazon (NASDAQ:AMZN), I mentioned how it seemed inevitable that shares would hit a new high rather soon. With sales booming during the coronavirus and investors banking on the growth of Amazon Web Services, I figured we could see shares top $2,500 at some point. That did recently happen, and this week, Amazon used this favorable investor sentiment to borrow a huge chunk of money at very low rates.
(Source: Yahoo Finance)
At the end of Q1, Amazon had a little more than $49 billion in cash and marketable securities on its balance sheet. The company also had more than $23 billion in long-term debt, along with $40 billion in long-term lease liabilities. Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations decreased to $11.7 billion for the trailing twelve months ending this March, as compared to $11.8 billion for the trailing twelve months ended March 31, 2019.
Despite that small decline, Amazon still produces a decent amount of cash. Of course, the current figure pales in comparison to technology giant Apple (AAPL) that generates 4 or 5 times that annually, which allows for the greatest capital return plan we've ever seen. However, I bring up Apple because it was just about a month ago where Apple itself borrowed $8.5 billion in new debt. In the table below, you can see a comparison of these two debt offerings.
Amazon borrowed $10 billion in total, $1.5 billion more than Apple, but this week's offering did have two extra tranches. What's interesting is that all four of Amazon's similar length bond issues had lower respective rates than Apple's did. Apparently, the market thought Amazon was very low risk. For instance, on the 3-year notes, Amazon is only paying 25 basis points above the US Treasury benchmark, where Apple for the same time frame was paying a 60 bps spread.
If we look at the total offering, Amazon received a weighted average coupon of 1.76%. In total, the company will add a little more than $175 million in annual interest expenses. As the most recent 10-K filing shows, 2019 saw Amazon report $1.6 billion in total interest expenses, up from $848 million two years earlier. Of course, that's a paltry amount on the income statement when you consider that net sales were up more than $102 billion over that time.
Despite Amazon shares being near their all-time highs, I mentioned in my previous article that the street saw more upside coming. Since then, the average price target has risen a little more, now approaching $2,700 per share. With consumer spending increasing as employment rebounds, and the increased number of traditional retailers going away, Amazon sales are projected to keep soaring in the coming years. Throw on the fast-growing Amazon Web Services segment, which is the company's most profitable segment currently, and the future looks very bright.
In the end, Amazon was able to use its financial might and strong stock price to leverage a tremendous bond deal. The company was able to get very low rates on its $10 billion offering, even beating out Apple's debt raise from a month ago. With sales growth remaining strong as traditional retail continues to die off, this week's bond deal shows how much investors believe in Amazon's future potential.
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