Amazon: Margins Aren't What They Seem As Debt Risk Grows

Seekingalpha2023-01-30

SummaryPhenomenal growth and growing margins make a strong investment narrative for the retailing giant, but dig a little deeper and there is more to Amazon's story.Underlying cash profitability for ...

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Comments

supre
2023-01-31
supre
I'm so grateful to Mrs Teresa Fuller for making me believe online trading. I never thought any of this was real and I was so scared of losing my money.now I benefit alot from Teresa Fuller Platform on Facebook
Johny Lange
2023-01-30
Johny Lange
No one cares now. This is why we use Forward Earnings and P/E. Still very valuable at this rate. But slides due to fear and factoring Logistics costs.

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This shows us just how much the finance operations of Amazon affect profitability (finance operations includes repayment/issuance of debts, stock issuances/repurchases, & foreign exchange rate profits/losses).Below, we visualise how these margins and profitability appear over the last 10 years.Author(I'll acknowledge here that yes, Amazon is a company that is profitable based on its scale, not large margins. But low margins mean greater sensitivity to large-scale costs, like debt financing, which will discuss below)But we need to account for how these operations are financed (through debt and equity) and look closely at how the debt risk is being priced by the market to get a sense of how investors view the profitability and financial health of Amazon.Amazon Bonds - Trading At A Discount To Face ValueI have a lot of respect of bonds traders in their assessment of companies and their risk, after all, if a bond coupon payment isn't made, the issuing firm is insolvent. So bonds traders are the best group to take a pulse from on a firm and its financial health.Using my own metrics to assess a firm's financial health, I would rate AMZN a 79% overall financial health, given a poor showing on the quick ratio, a significant debt-to-equity score, low margins and a large short-term debt component.AuthorBut I'm only looking at the financial reports publicly available, whereas bonds traders have access to a lot more than I do.Looking on FINRA, we can see all the bonds issued by Amazon currently (44, not including Whole Foods bonds).These bonds have an average coupon of 3.07%, priced at $93.434 and yielding investors 4.342% to expiry.This information needs some context however so we can understand these figures in comparison to alternatives.FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.For comparison's sake, US 10y treasury bonds are trading at around 3.52%, giving us a good \"risk-free rate\". Amazon bonds by comparison are trading a full 82 basis points higher, indicating the level of risk vs the risk-free rate investors are pricing in.ycharts.comThe average Moody's Seasoned Aaa Corporate Bond Yield currently trades at 4.34%, almost exactly the average AMZN bond yield.fred.stlouisfed.orgWhile having bond yields sitting almost exactly at the AAA bond yield average is an acceptable result for any firm, AMZN bonds, even with near-term expiries can be acquired with yields above 5%, well in excess of the AAA yield average.FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.This paints a picture of a bonds market that has some concerns for the firm and inflationary/interest rate environments (not to mention a potential recession).So why raise this? Well, Amazon's growth requires some pretty hefty funding, to cover day-to-day operations as well as acquisitions and capital expenditures. And Amazon has been issuing immense levels of debt.Seeking AlphaTotal short-term + long-term debt has grown 3,727% from $4.409 billion in 2012 to $164.334 billion in 2023, and grown from 38% debt-to-equity up to 57%, greatly increasing the leverage and risk/reward profile of the firm.Closing ThoughtsOverall, I'm not going to suggest that Amazon is at risk of failure, insolvency or faces issues covering its debts. I believe it is an extremely well-run firm (financially speaking), managing its growth and its debts well, using leverage to keep the exponential growth story going.2023 will throw some challenges at the firm, but I believe it's important to take note of bond markets pricing some AMZN bonds as higher-risk assets than typical AAA-rated bonds.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9955970798,"gmtCreate":1675168884914,"gmtModify":1676538981280,"author":{"id":"4138270331761452","authorId":"4138270331761452","authorIdStr":"4138270331761452","name":"supre","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"4138270331761452"},"htmlText":"I'm so grateful to Mrs Teresa Fuller for making me believe online trading. I never thought any of this was real and I was so scared of losing my money.now I benefit alot from Teresa Fuller Platform on Facebook","listText":"I'm so grateful to Mrs Teresa Fuller for making me believe online trading. I never thought any of this was real and I was so scared of losing my money.now I benefit alot from Teresa Fuller Platform on Facebook","text":"I'm so grateful to Mrs Teresa Fuller for making me believe online trading. I never thought any of this was real and I was so scared of losing my money.now I benefit alot from Teresa Fuller Platform on Facebook","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9955970798","repostId":2307214501,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9955084740,"gmtCreate":1675077294280,"gmtModify":1676538974545,"author":{"id":"4132629292469752","authorId":"4132629292469752","authorIdStr":"4132629292469752","name":"Johny Lange","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4132629292469752"},"htmlText":"No one cares now. This is why we use Forward Earnings and P/E. Still very valuable at this rate. But slides due to fear and factoring Logistics costs.","listText":"No one cares now. This is why we use Forward Earnings and P/E. Still very valuable at this rate. But slides due to fear and factoring Logistics costs.","text":"No one cares now. This is why we use Forward Earnings and P/E. Still very valuable at this rate. But slides due to fear and factoring Logistics costs.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9955084740","repostId":2307214501,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":29,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2307214501"}